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Competitive screening of customers with non-common priors

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  • Uthemann, Andreas

Abstract

This paper provides an explanation for the variety of contracts offered by competitive firms for seemingly identical products or services. I show that two competing firms offering menus of non-linear price schedules to customers with biased beliefs about their future demand will be able to screen these customers on the basis of their priors. Firms' use of menus of tariffs can thus be understood as screening devices for boundedly rational consumers. However, while such menus allow firms to screen their customers according to their ability to correctly forecast future demand, they do not allow them to extract additional rents provided the market is sufficiently competitive and firms' have identical priors concerning their customers' types. Sufficiently strong competition guarantees that each tariff only covers the fixed costs of the firm. Competition between firms however cannot remedy the bias in consumers' beliefs about their future demand.

Suggested Citation

  • Uthemann, Andreas, 2017. "Competitive screening of customers with non-common priors," LSE Research Online Documents on Economics 118948, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118948
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    File URL: https://researchonline.lse.ac.uk/id/eprint/118948/
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    References listed on IDEAS

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    1. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-391, June.
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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