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

  • Qihong Liu

    (SUNY - Stony Brook)

  • Konstantinos Serfes

    (SUNY - Stony Brook)

We look at the incentives of two firms, who produce horizontally differentiated products, to acquire information of a certain quality on consumer willingness to pay. A firm who possesses such information can offer its product to different consumer groups at different prices (third degree price discrimination). We show that ``acquiring information'' and ``price discriminating'' is each firm's dominant strategy (for relatively low information costs) resulting in lower profit than when neither firm is engaged in price discrimination. Moreover, and given that firms price discriminate, equilibrium profits and average price exhibit a U-shape as a function of the information quality. Consumers are unambiguously better off under price discrimination as each one pays a lower price than the uniform non- discriminatory price.

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Paper provided by EconWPA in its series Industrial Organization with number 0105002.

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Length: 34 pages
Date of creation: 30 May 2001
Date of revision:
Handle: RePEc:wpa:wuwpio:0105002
Note: Type of Document - Acrobat PDF; prepared on PC; to print on PostScript (letter size paper); pages: 34; figures: included
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