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Price Discrimination with Private and Imperfect Information

Authors

  • Rosa-Branca Esteves

    1. Universidade do Minho, Braga, Portugal
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    • I am extremely grateful to Mark Armstrong for helpful discussions and suggestions. For comments on early versions of this paper, I am grateful to Paul Klemperer, Robin Mason, and participants of the 2008 EARIE Conference and of the 2008 Latin American Meeting of the Econometric Society. I would also like to thank the two referees, who provided constructive comments and suggestions. Financial support from Fundação para a Ciência e a Tecnologia under the project PTDC/EGE-ECO/108784/2008 is gratefully acknowledged. Of course, any errors remain my own.

    • Member of the Economic Policies Research Unit (NIPE).


Abstract

In this paper, I investigate the competitive and welfare effects of the improvements in information accuracy in markets where firms can price discriminate after observing a private and noisy signal about a consumer's brand preference. I show that when firms believe that consumers have a brand preference for them, then they charge more to these consumers, and this price has an inverse U-shaped relationship with the signal's accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signal's accuracy rises. While industry profit and overall welfare fall monotonically when price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus.

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