Bertrand Oligopoly with Boundedly Rational Consumers

In this paper we consider a model of Bertrand oligopoly when consumers are boundedly rational and make their purchase decisions probabilistically, according to the Luce model. We consider three different cases: first, we characterize equilibrium when firms face boundedly rational consumers with the fixed irrationality parameter λ$$\lambda $$; second, we discuss the case of obfuscating oligopoly, when firms can invest in order to confuse consumers, i.e. to increase their λ$$\lambda $$; and third, we consider educating oligopoly, when firms can choose to invest to decrease λ$$\lambda $$. We show that while it is worthwhile for the firms to confuse the consumers, it is only optimal to educate them if they are sufficiently rational at default. We also analyze how the social welfare, consumer surplus and the firms’ profits depend on the number of firms.