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
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: Suggested Citation