Imperfect price discrimination in a vertical differentiation model

Abstract We explore the competitive implications of third-degree price discrimination based on consumer information of varying degrees of “precision” in a vertical differentiation duopoly model. We show that, if the cost of information is below a threshold, only the high quality firm will acquire it and offer targeted promotions, while the low quality firm will commit to a uniform price, for any degree of consumer information precision. Equilibrium profits of the high quality firm are monotonically increasing and that of the low quality firm monotonically decreasing as a function of the consumer information precision. Finally, social and consumer welfare are monotonically increasing with respect to the precision of consumer information.

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