Quality of Information and Oligopolistic Price Discrimination

Abstract

Recent developments in information technology (IT) have resulted in the collection of a vast amount of customer‐specific data. As IT advances, the quality of such information improves. We analyze a unifying spatial price discrimination model that encompasses the two most studied paradigms of two‐group and perfect discrimination as special cases. Firms use the available information to classify the consumers into different groups. The number of identifiable consumer segments increases with the information quality. Among our findings (1) when the information quality is low, unilateral commitments not to price discriminate arise in equilibrium; (2) after a unique threshold of information precision such a commitment is a dominated strategy, and the game becomes a prisoners' dilemma; and (3) equilibrium profits exhibit a U‐shaped relationship with the information quality.

Partial price discrimination by an upstream monopolist

“…This introduces an interesting trade-off in the analysis: the gains of price discrimination have to be compared with its costs, which allows us to endogenously determine the extent of price discrimination. Our paper is close in spirit to Liu and Serfes (2004) in the sense that, in both papers, price discrimination involves a costly investment that imposes a trade-off on the decision to price discriminate. However, whereas Liu and Serfes (2004) focus on final good markets we investigate intermediate markets.…”

“…Our paper is close in spirit to Liu and Serfes (2004) in the sense that, in both papers, price discrimination involves a costly investment that imposes a trade-off on the decision to price discriminate. However, whereas Liu and Serfes (2004) focus on final good markets we investigate intermediate markets. Moreover, the nature of the investment is very different in the two papers.…”

“…Moreover, the nature of the investment is very different in the two papers. Whereas in Liu and Serfes (2004) it improves market segmentation, in our paper it is used to customize prices. To the best of our knowledge, this possibility has been neglected so far by the literature.…”

Consumer flexibility, data quality and location choice

“…Firms can also acquire ‡exibility data, which is imperfect. To model imperfect customer data we follow Liu and Serfes (2004) and and assume that data quality is characterized by the exogenously given parameter k = 0; 1; 2; :::; 1. This data allows a …rm to identify 2 k ‡exibility segments and allocate each consumer to one of them.…”

“…In case of equal utilities we assume that a consumer buys from a closer …rm. 8 Firms know perfectly the location of each consumer in the market and can discriminate among consumers respectively. Firms can also acquire ‡exibility data, which is imperfect.…”