Friday, February 22, 2019

Private information, price discrimination, and collusion

Peiseler, Florian; Rasch, Alexander; Shekhar, Shiva theorize Private information, price discrimination, and collusion.

Abstract: We analyze firms' ability to sustain collusion in a setting in which horizontally differentiated firms can price-discriminate based on private information regarding consumers' preferences. In particular, firms receive private signals which can be noisy (e.g., big data predictions). We find that there is a non-monotone relationship between signal quality and sustainability of collusion. Starting from a low level, an increase in signal precision first facilitates collusion. However, there is a turning point from which on any further increase renders collusion less sustainable. Our analysis provides important insights for competition policy. In particular, a ban on price discrimination can help to prevent collusive behavior as long as signals are sufficiently noisy.

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