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

  • Qihong Liu
  • Konstantinos Serfes

    ()

We investigate how the endogenous acquisition of information, of a certain quality level, on consumers' willingness to pay (location) affects the equilibrium prices and welfare in a spatial price discrimination model. Higher information quality implies that the firms who acquire the information can identify the location of each consumer more accurately. By varying the information quality we are able to obtain the equilibrium in the game for all levels of price discrimination and in the limit the case of perfect price discrimination. This gives us insights about equilibrium behavior in markets (especially on-line markets) where: 1) Information on consumer characteristics is used by the firms to facilitate price discrimination and 2) The quality of information is constantly improving due to advances of the information technology (IT). We show that information is beneficial for the consumer welfare, which is maximized at ``moderate'' levels of information quality. Firms' profits exhibit a U-shape pattern as a function of the information quality.

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File URL: http://www.stonybrook.edu/commcms/economics/research/papers/2001/01-03.pdf
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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. 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.
  2. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  3. Allen, Beth, 1986. "The Demand for (Differentiated) Information," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 311-23, July.
  4. Caglayan, Mustafa & Usman, Murat, 2000. "Costly signal extraction and profit differentials in oligopolistic markets," Economics Letters, Elsevier, vol. 69(3), pages 359-363, December.
  5. Hwang Hae-shin, 1993. "Optimal Information Acquisition for Heterogenous Duopoly Firms," Journal of Economic Theory, Elsevier, vol. 59(2), pages 385-402, April.
  6. Creane, Anthony, 1996. "An informational externality in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 331-344, May.
  7. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
  8. 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.
  9. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
  10. Schmalensee, Richard., 1980. "Output and welfare implications of monopolistic third-degree price discrimination," Working papers 1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  12. Thomas R. Palfrey, 1982. "Risk Advantages and Information Acquisition," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 219-224, Spring.
  13. 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.
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