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Endogenous Acquisition of Information on Consumer Willingness to Pay in a Product Differentiated Duopoly

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  • Qihong Liu
  • Konstantinos Serfes

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Abstract

We look at the incentives of two firms, who produce horizontally differentiated products, to acquire information of a certain quality on consumer willingness to pay. A firm who possesses such information can offer its product to different consumer groups at different prices (third degree price discrimination). We show that ``acquiring information'' and ``price discriminating'' is each firm's dominant strategy (for relatively low information costs) resulting in lower profit than when neither firm is engaged in price discrimination. Moreover, and given that firms price discriminate, equilibrium profits and average price exhibit a U-shape as a function of the information quality. Consumers are unambiguously better off under price discrimination as each one pays a lower price than the uniform non- discriminatory price.

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Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 01-03.

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Date of creation: 2001
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Handle: RePEc:nys:sunysb:01-03

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  1. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
  2. Thomas R. Palfrey, 1982. "Risk Advantages and Information Acquisition," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 219-224, Spring.
  3. Bester, H. & Petrakis, E., 1994. "Coupons and Oligopolistic Price Discrimination," Discussion Paper 1994-12, Tilburg University, Center for Economic Research.
  4. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  5. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
  6. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March.
  7. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  8. Creane, Anthony, 1996. "An informational externality in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 331-344, May.
  9. Hwang Hae-shin, 1993. "Optimal Information Acquisition for Heterogenous Duopoly Firms," Journal of Economic Theory, Elsevier, vol. 59(2), pages 385-402, April.
  10. Hwang, Hae-shin, 1995. "Information Acquisition and Relative Efficiency of Competitive, Oligopoly and Monopoly Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 325-40, May.
  11. Caglayan, Mustafa & Usman, Murat, 2000. "Costly signal extraction and profit differentials in oligopolistic markets," Economics Letters, Elsevier, vol. 69(3), pages 359-363, December.
  12. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  13. Allen, Beth, 1986. "The Demand for (Differentiated) Information," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 311-23, July.
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