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

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

By:

Daniel F. Garrett (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Renato Gomes (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Lucas Maestri (FGV-EPGE - Universidad de Brazil)

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.