Exogenous vs Endogenous Consumer Time Preferences : Oligopoly

We propose a dynamic framework for durable-goods with consumers who have different valuations and an arbitrary number of firms which compete in quantities in each period. Consumers' ability to behave strategically about the timing of consumption differs in the three environments that we analyze. Under perfect rationality, consumers are exogenously strategic. Under extreme bounded rationality, consumers are exogenously myopic. Under explicit bounded rationality, consumers start the game myopic and can become strategic by incurring a cost after they observe the first-period price. We explore the effects of entry, mergers, and an increase in the cognition cost on profits and consumer surplus.Entry: We prove that no exogenously strategic consumers become worse off after entry. In contrast to this, for certain parameter constellations, some exogenously myopic consumers pay higher prices after entry when entry leads them to change the timing of consumption; either all of these consumers or a segment of these become worse off after entry. When a positive mass of consumers become endogenously strategic both before and after entry, we find that consumers who may experience harmful entry include those who remain myopic before entry and become strategic---without changing the timing of consumption---after entry.Mergers: Under perfect rationality, it is well-established in the existing literature on durable-goods markets with Cournot competition that the merger paradox weakens within two-period settings. We show that this may not hold under extreme and explicit bounded rationality. The paradox may even be exacerbated. Even if participants represent more than 80% of the industry, the merger may not be profitable.Increase in the cognition cost: Conventional wisdom dictates that an increase in the transparency of the market benefits consumers and hurts firms. In our oligopolistic framework, the cognition cost is the obstacle to market transparency. Previous research based on comparable assumptions yields the result according to which an increase in the cognition cost always increases monopolistic profits. This result cannot generalize to oligopoly. When the cognition cost tends to zero, then a small increase in the cost leads to a decrease in per firm profits provided that the discount factor is high