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Price Discrimination with Varying Qualities of Information

Forthcoming, B.E. Journal of Economic Analysis and Policy

28 Pages Posted: 25 Oct 2013 Last revised: 13 Dec 2015

Qihong Liu

University of Oklahoma - Department of Economics

Jie Shuai

Zhongnan University of Economics and Law

Date Written: December 2, 2015

Abstract

Advances in information technology have greatly enhanced firms' ability to collect, market and utilize consumer information. As the market for consumer information expands rapidly, businesses are armed with unprecedented means to target any group of consumers they desire. This has important and far-reaching impacts on consumer welfare. In this paper we analyze the welfare impacts of price discrimination facilitated by increasing qualities of consumer information. We employ a two-dimensional spatial differentiation model where consumer information is available on one dimension, and better information leads to more refined price discrimination. We find that as information quality improves, equilibrium prices and profits monotonically increase while consumer surplus and social surplus monotonically decrease. Price discrimination has a reduced demand elasticity effect which becomes stronger when consumer information becomes more precise. Our results suggest that regulators need to pay more attention to the potential damage to consumer welfare by the increasing collection and utilization of consumer information. We also endogenize firms' information acquisition decisions.

Keywords: Multi-dimension; Price discrimination; Information quality; Reduced demand elasticity effect

JEL Classification: D43, L13, L40

Suggested Citation

Liu, Qihong and Shuai, Jie, Price Discrimination with Varying Qualities of Information (December 2, 2015). Forthcoming, B.E. Journal of Economic Analysis and Policy. Available at SSRN: https://ssrn.com/abstract=2344777 or http://dx.doi.org/10.2139/ssrn.2344777

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Jie Shuai

Zhongnan University of Economics and Law ( email )

182 Nanhu Ave.
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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