Competition, Incomplete Discrimination and Versioning
AbstractTwo producers offer differentiated goods to a representative consumer. The buyer has distinct marginal valuations for the quality of the products. Each producer knows perfectly the consumer’s taste for its own product, but remains uninformed about its taste for the rival’s product. When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm’s offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer’s rent increases with their valuation for one product and decreases with the valuation for the other product. This provides some foundations for the phenomenon of versioning, which has been observed in some digital goods markets. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents. The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer offers second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination to soften competition.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4589.
Date of creation: Sep 2004
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Other versions of this item:
- Diaw, K. & Pouyet, J., 2004. "Competition, Incomplete Discrimination and Versioning," Discussion Paper 2004-69, Tilburg University, Center for Economic Research.
- DIAW, Khaled & POUYET, Jerome, 2004. "Competition, incomplete discrimination and versioning," CORE Discussion Papers 2004054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Khaled Diaw & Jérôme Pouyet, 2004. "Competition, Incomplete Discrimination and Versioning," Working Papers 2004-20, Centre de Recherche en Economie et Statistique.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-13 (All new papers)
- NEP-COM-2005-02-13 (Industrial Competition)
- NEP-IND-2005-02-13 (Industrial Organization)
- NEP-MIC-2005-02-13 (Microeconomics)
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