Working Paper: CEPR ID: DP15253
Authors: Renato Gomes; Lucas Maestri; Jean-Marie Lozachmeur
Abstract: We study oligopolistic competition by firms engaging in second-degree price discrimination. In line with the large empirical literature on demand estimation, our theory allows for comovements between consumers' taste for quality and propensity to switch brands. If low-type consumers are sufficiently less (more) brand loyal than high types, (i) quality provision is inefficiently low at the bottom (high at the top) of the product line, and (ii) informational rents are negative (positive) for high types, while positive (negative) for low types. We produce several testable comparative statics on pricing and quality provision, and show that more competitive markets (in the sense that consumers are less brand-loyal) may produce lower welfare. Interestingly, pure-strategy equilibria fail to exist whenever brand loyalty is sufficiently different across consumers types. Accordingly, our theory identifies a new rationale for price/quality dispersion; namely, the interplay between self-selection constraints and heterogeneity in brand loyalty.
Keywords: competition; price discrimination; asymmetric information; preference correlation; price dispersion
JEL Codes: D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-type consumers' brand loyalty (D12) | quality provision is inefficiently low (L15) |
| high-type consumers' brand loyalty (D12) | quality provision is inefficiently high (L15) |
| brand loyalty (M37) | distribution of quality across product lines (L15) |
| consumer type (D19) | informational rents (D89) |
| brand loyalty (M37) | market welfare (D69) |
| brand loyalty varies across consumer types (D12) | market stability (D53) |