Naive Analytics: The Strategic Advantage of Algorithmic Heuristics

67 Pages Posted: 30 Nov 2020 Last revised: 17 Sep 2023

See all articles by Ron Berman

Ron Berman

University of Pennsylvania - The Wharton School

Yuval Heller

Bar Ilan University

Date Written: September 12, 2023

Abstract

We study interactions with uncertainty about demand sensitivity that is estimated by analytics algorithms. In our solution concept (1) firms choose seemingly optimal strategies given the level of sophistication of their data analytics algorithms, and (2) the levels of sophistication form best replies to one another. Under the ensuing equilibrium the firms’ algorithms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to overspend on advertising and to set prices too high. In games with strategic complements (substitutes), profits induced by this “naive analytics” equilibrium Pareto dominate (are dominated by) those induced by the Nash equilibrium.

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: The Strategic Advantage of Algorithmic Heuristics (September 12, 2023). 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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