History-Based Price Discrimination with Imperfect Information Accuracy and Asymmetric Market Shares

In this paper, we consider a duopoly model with history-based price discrimination where firms have imperfect information on consumers’ purchase history and asymmetric inherited market shares. We analyze the effects of the degree of information accuracy on market configuration, firms profits, and consumers surplus. We find that the equilibrium market structure is jointly determined by the size of the inherited market shares and the degree of information accuracy. With high degrees of information accuracy firms are more likely to use symmetric pricing strategies, both poaching rival’s consumers. Conversely, with low degrees of information accuracy or highly asymmetric market shares, firms adopt different pricing strategies and price discrimination is enforced only by the firm inheriting the smaller quota of market shares. We show that, everything else equal, a higher degree of information accuracy has a non-monotonic effect on firms’ profits and a decreasing effect on social welfare; the effect on consumer surplus varies according to the equilibrium market configuration.