Competitive Screening under Heterogeneous Information

Abstract

We build a theory of second-degree price discrimination under imperfect competition that allows us to study the substitutive role of prices and qualities in increasing sales. A key feature of our model is that consumers are heterogeneously informed about the o↵ers available in the market, which leads to dispersion over price-quality menus in equilibrium. While firms are ex-ante identical, their menus are ordered so that more generous menus leave more surplus uniformly over consumer types. We generate empirical predictions by exploring the e↵ects of changes in market fundamentals on the distribution of surplus across types, and pricing across products. For instance, more competition may raise prices for low-quality goods; yet, consumers are better o↵, as the qualities they receive also increase. The predictions of our model illuminate empirical findings in many markets, such as those for cell phone plans, yellow-pages advertising, cable TV and air travel.

Replaced by

Daniel F. Garrett, Renato Gomes, and Lucas Maestri, “Competitive Screening under Heterogeneous Information”, The Review of Economic Studies, vol. 86, 2019, pp. 1590–1630.

Reference

Daniel F. Garrett, Renato Gomes, and Lucas Maestri, “Competitive Screening under Heterogeneous Information”, 2016.