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Noisy Learning and Price Discrimination: Implications for Information Dissemination and Profits

  • Catherine Gendron-Saulnier
  • Marc Santugini

We study third-degree price discrimination in the presence of uninformed buyers who extract noisy information from observing prices. In a noisy learning environment, price discrimination can be detrimental to the firm and beneficial to the consumers. On the one hand, discriminatory pricing reduces consumers’ uncertainty, i.e., the variance of posterior beliefs upon observing prices is reduced. Specifically, observing two prices under discriminatory pricing provides more information than one price under uniform pricing even when discriminatory pricing reduces the amount of information contained in each price. On the other hand, it is not always optimal for the firm to use discriminatory pricing since the presence of uninformed buyers provides the firm with the incentive to engage in noisy price signaling. Indeed, if the benefit from price flexibility (through discriminatory pricing) is offset by the cost signaling quality through two distinct prices, then it is optimal to integrate markets and thus to use uniform pricing.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 1335.

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Date of creation: 2013
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Handle: RePEc:lvl:lacicr:1335
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  1. 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.
  2. Friberg, Richard, 2000. "Two monies, two markets? Variability and the option to segment," SSE/EFI Working Paper Series in Economics and Finance 349, Stockholm School of Economics.
  3. Gallo, Fredrik, 2010. "To Segment or Not to Segment Markets? A Note on the Profitability of Market Segmentation for an International Oligopoly," Working Papers 2010:5, Lund University, Department of Economics.
  4. Mirman, Leonard J. & Salgueiro, Egas M. & Santugini, Marc, 2014. "Noisy signaling in monopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 504-511.
  5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
  6. Chien-Ping Chen, 2009. "A Puzzle or a Choice: Uniform Pricing for Motion Pictures at the Box," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(1), pages 73-85, March.
  7. Richard Friberg, 2003. "Common Currency, Common Market?," IEHAS Discussion Papers 0305, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  9. Catherine Gendron-Saulnier & Marc Santugini, 2013. "The Informational Benefit of Price Discrimination," Cahiers de recherche 13-02, HEC Montréal, Institut d'économie appliquée.
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