Oligopoly under incomplete information: On the welfare effects of price discrimination

Daniel Garrett, Renato Gomes and Lucas Maestri

International Journal of Industrial Organization, 2021, vol. 79, issue C

Abstract: We study competition by firms that simultaneously post (potentially nonlinear) tariffs to consumers who are privately informed about their tastes. Market power stems from informational frictions, in that consumers are heterogeneously informed about firms’ offers. In the absence of regulation, all firms offer quantity discounts. As a result, relative to Bertrand pricing, imperfect competition benefits disproportionately more consumers whose willingness to pay is high, rather than low. Regulation imposing linear pricing hurts the former but benefits the latter consumers. While consumer surplus increases, firms’ profits decrease, enough to drive down utilitarian welfare. By contrast, improvements in market transparency increase utilitarian welfare, and achieve similar gains on consumer surplus as imposing linear pricing, although with limited distributive impact. On normative grounds, our analysis suggests that banning price discrimination is warranted only if its distributive benefits have a weight on the societal objective.

Keywords: Oligopoly; Nonlinear pricing; Linear pricing; Informational frictions; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:79:y:2021:i:c:s016771872100028x

DOI: 10.1016/j.ijindorg.2021.102735

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