Naive Analytics Equilibrium

52 Pages Posted: 30 Nov 2020 Last revised: 30 Mar 2021

See all articles by Ron Berman

Ron Berman

University of Pennsylvania - The Wharton School

Yuval Heller

Bar Ilan University

Date Written: March 30, 2021

Abstract

We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.

Keywords: advertising, pricing, data analytics, strategic distortion, strategic complements, indirect evolutionary approach

JEL Classification: C73, D43, M37

Suggested Citation

Berman, Ron and Heller, Yuval, Naive Analytics Equilibrium (March 30, 2021). Available at SSRN: https://ssrn.com/abstract=3718803 or http://dx.doi.org/10.2139/ssrn.3718803

Ron Berman (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Yuval Heller

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

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