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

Garrett, Daniel and Gomes, Renato and Maestri, Lucas (2021) 'Oligopoly under incomplete information: On the welfare effects of price discrimination.' International Journal of Industrial Organization, 79. p. 102735. ISSN 0167-7187

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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.

Item Type: Article
Uncontrolled Keywords: Oligopoly; Nonlinear pricing; Linear pricing; Informational frictions; Asymmetric information
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Economics, Department of
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 13 Oct 2021 20:08
Last Modified: 02 Mar 2022 23:05
URI: http://repository.essex.ac.uk/id/eprint/31211

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