A biased firm in a market with complementary products. A note on the welfare effects
| DOI | http://doi.org/10.1111/sjpe.12236 |
| Author | Clemens Buchen,Alberto Palermo |
| Date | 01 September 2020 |
| Published date | 01 September 2020 |
448
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Scott J Polit Econ. 2020 ;67:448–453.
wileyonlinelibrary.com/journal/sjpe
1 | INTRODUCTION
We analyse a duopol y with differentiated pro ducts, which are compl ements. One of the two fir ms in this market
is biased in its pe rception of the demand. This me ans that one firm can either ove restimate or underestim ate its
own absolute adv antage. At firs t glance, intuiti on suggests t hat market forces sho uld decrease th e viability of
the biased fir m. However, we show that under certain con ditions, producers' surpl us increases compared to the
unbiased case . We show that the bias—if not too large—can i nternalize parts of the neg ative externality that th e
complementa rity of goods cre ates. Moreover, we are abl e to prove that also the co nsumers' surpl us increases,
therefore implying an increase in the total welfare.
Recently, the study o f different kinds of biases on t he part of economic actor s has received increasing atte n‐
tion. On the one h and, this comes from a need t o accommodate growing evide nce from psychology. For exam ple,
Weinstein (1980) and more re cently Sharot (2011) point to the fac t that people not only tend to b e unrealistically
Accepted: 17 Octo ber 2019
DOI: 10 .1111/sjpe.1 2236
ORIGINAL ARTICLE
A biased firm in a market with complementary
products. A note on the welfare effects
ClemensBuchen1 | Alberto Palermo2
This is an open ac cess article und er the terms of the Crea tive Commons Attr ibution License, w hich permits use , distribution an d
reproduct ion in any medium, pro vided the origina l work is properly cit ed.
© 2019 The Authors . Scottish Journal of Political Economy published by John Wi ley & Sons Ltd on behalf of S cottish Economic
Soci ety.
1EBS Business S chool, Wiesbade n, Germany
2IAAEU, Trier, Germany
Correspondence
Clemens Buc hen, EBS Business Sc hool,
Wiesbaden, Germany.
Email: clemens.buchen@ebs.edu
Abstract
We analyse a duopoly set ting with compleme ntary prod‐
ucts, in which a f irm has a bias about its absolute a dvantage.
We show that the bias can intern alize parts of the ne gative
externality t hat the complement arity of goods create s im‐
plying a higher prod ucer's surplus. More over, we analyse
additional conditi ons, which lead to an incr ease in the con‐
sumer's surplus. Counterintuitively, we show that the pres‐
ence of a bias can lead to a posi tive welfare effect.
KEYWORDS
Bias, complementary products, oligopoly
JELCLASS IFICATION
D21; D62; L13
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