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Competition, Incomplete Discrimination and Versioning

Author

Listed:
  • Khaled Diaw

    (Crest)

  • Jérôme Pouyet

    (Crest)

Abstract

Producers of software viewers commonly offer basic versions of their products for freewhile more sophisticated versions are highly priced, thereby providing less attractive orlower valuations consumers with larger utility levels. We give some foundations to thisoutcome called versioning. We consider a duopoly in which firms offer differentiated goodsto a representative consumer; the buyer has distinct marginal valuations for the quality ofthe products; each producer perfectly knows the consumer’s taste for its own product, butremains uninformed about its taste for the rival’s product.When each product cannot be purchased in isolation of the other one, a phenomenon ofendogenous preferences arises since a firm’s offer to the consumer depends on the informationunknown by the rival firm. Multiple equilibria emerge and the consumer’s rent increases withhis valuation for one product and decreases with the valuation for the other product. Bycontrast, when each product can be purchased in isolation of the other one, at the uniqueequilibrium consumers with larger valuations for a product earn higher rents.The analysis is undertaken under two alternative pricing policies: in the partially-discriminatorycase, producers make use of the known information only; in the fully-discriminatorycase, each producer second-degree price discriminates the consumer according to the unknowninformation. We show that, sometimes, firms prefer partial to full discrimination,i.e., strategic ignorance of consumers’ tastes for the rival brand softens competition.

Suggested Citation

  • Khaled Diaw & Jérôme Pouyet, 2004. "Competition, Incomplete Discrimination and Versioning," Working Papers 2004-20, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2004-20
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • 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

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