Noisy Learning and Price Discrimination: Implications for Information Dissemination and Profits

CIRPEE Working Paper No. 13-35 Septembre/September 2015 (version revisée)

41 Pages Posted: 27 Sep 2013 Last revised: 15 Oct 2015

See all articles by Catherine Gendron-Saulnier

Catherine Gendron-Saulnier

University of Montreal - Department of Economics

Marc Santugini

University of Virginia - Department of Economics

Date Written: April 13, 2015

Abstract

We study third-degree price discrimination in the presence of uninformed buyers who extract noisy information from observing prices. In a noisy learning environment, price discrimination can be detrimental to the firm and beneficial to the consumers. On the one hand, discriminatory pricing reduces consumers’ uncertainty, i.e., upon observing prices, the variance of posterior beliefs is reduced. Specifically, observing two prices under discriminatory pricing provides more information than one price under uniform pricing even when discriminatory pricing reduces the amount of information contained in each price. On the other hand, it is not always optimal for the firm to use discriminatory pricing since the presence of uninformed buyers provides the firm with the incentive to engage in noisy price signaling. Indeed, if the benefit from price flexibility (through discriminatory pricing) is offset by the cost signaling quality through two distinct prices, then it is optimal to integrate markets and thus to use uniform pricing.

Keywords: Discriminatory pricing, market segmentation, monopoly, quality of information, learning, uniform pricing, third-degree price discrimination

JEL Classification: D82, D83, L12, L15

Suggested Citation

Gendron-Saulnier, Catherine and Santugini, Marc, Noisy Learning and Price Discrimination: Implications for Information Dissemination and Profits (April 13, 2015). CIRPEE Working Paper No. 13-35 Septembre/September 2015 (version revisée), Available at SSRN: https://ssrn.com/abstract=2330995 or http://dx.doi.org/10.2139/ssrn.2330995

Catherine Gendron-Saulnier

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

Marc Santugini (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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