Perfect Information vs Random Investigation: Safety Guidelines for a Consumer in the Jungle of Product Differentiation

TL;DR

This paper models consumer decision-making using graph theory, showing how information, knowledge, and perception influence choices, and finds that random investigation can outperform informed strategies under certain conditions.

Contribution

It introduces a graph-theoretic model of consumer choice incorporating awareness and perception, and demonstrates the effectiveness of random investigation strategies.

Findings

Small information levels can lead to high utility

Complete ignorance hampers consumption

Random walks can outperform informed strategies below a threshold

Abstract

We present a graph-theoretic model of consumer choice, where final decisions are shown to be influenced by information and knowledge, in the form of individual awareness, discriminating ability, and perception of market structure. Building upon the distance-based Hotelling's differentiation idea, we describe the behavioral experience of several prototypes of consumers, who walk a hypothetical cognitive path in an attempt to maximize their satisfaction. Our simulations show that even consumers endowed with a small amount of information and knowledge may reach a very high level of utility. On the other hand, complete ignorance negatively affects the whole consumption process. In addition, rather unexpectedly, a random walk on the graph reveals to be a winning strategy, below a minimal threshold of information and knowledge.