CeDEx Seminar - Kim-Sau Chung (University of Hong Kong)

Abstract

We are indifferent between two cups of coffee when one differs from another in having only one more grain of sugar. But such an indifference is not transitive, because eventually, after many enough grains of sugar are added, we will become able to tell one cup is sweeter than the other. Ever since Luce (1956), economists have developed various representations of decision makers featuring intransitive indifference, but never explored how they may affect classical economic analyses. This paper studies sellers’ equilibrium behavior when consumers feature intransitive indifference. Among our main findings are: (i) consumers’ intransitive indifference hurts a monopolist’s profit; (ii) a monopolist would post a non-degenerate distribution of prices in equilibrium for a purpose different from screening; (iii) a monopolist’s ability to market a second brand at negligible costs may paradoxically hurt its profit; (iv) however, its ability to market at negligible costs a suffciently large number of brands, almost all of which are not meant to make any sale, will necessarily help its profit; (v) more competition does not always benefit consumers, as “competing” sellers free-ride instead of undercut each other; and (vi) when multiple sellers compete, consumers’ surplus is decreasing in their ability to discern prices.