Consumer Information and the Limits to Competition

This paper studies competition between Örms when consumers observe a pri- vate signal of their preferences over products. Within the class of signal structures which induce pure-strategy pricing equilibria, we derive signal structures which are optimal for Örms and those which are optimal for consumers. The Örm-optimal policy ampliÖes underlying product di§erentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens di§erentiation, which inten- siÖes competition, but induces some consumers to buy their less-preferred prod- uct. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed áexibly.