Effects of Cost-Information Transparency on Intertemporal Price Discrimination

Production and Operations Management, Forthcoming

47 Pages Posted: 16 Feb 2016 Last revised: 24 Aug 2020

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Tianxin Zou

University of Florida - Warrington College of Business Administration

Date Written: August 21, 2020

Abstract

A firm’s product-cost information is increasingly transparent to consumers as the firm itself or third parties publish such information, which reduces consumers’ uncertainty for the product’s cost. Using a dynamic model of firm pricing with forward-looking consumer choices, this paper assesses how cost transparency affects the firm’s intertemporal price discrimination and profit, as well as the consumers’ strategic waiting decisions and surplus. Ceteris paribus, if consumers believe a durable product has a lower cost, they will expect a larger future price drop and tend to delay purchases, impeding the firm’s ability to engage in intertemporal price discrimination. Without cost transparency, consumers may infer products with higher prices to have higher costs, giving a low-cost firm incentive to mimic a high-cost firm’s high price to encourage consumers to buy early. In contrast, a high-cost firm may choose to distort its price to avoid a low-cost firm’s price mimicry. Cost transparency reveals the product’s true cost to consumers, limiting the low-cost firm’s ability to mimic prices. Thus, cost transparency will benefit (harm) a firm with a high (low) cost. In equilibrium, cost transparency will increase the firm’s sales volume and induce more consumers to buy the product earlier instead of later, attenuating strategic waiting by consumers. We also find that cost transparency can lead to higher prices and hurt consumers if the firm has a high cost. In expectation, cost transparency leads to higher firm profits and consumer surplus, facilitating a firm’s new-product innovation.

Keywords: dynamic pricing, intertemporal price discrimination, strategic consumer, cost transparency, pricing strategy, innovation

Suggested Citation

Jiang, Baojun and Sudhir, K. and Zou, Tianxin, Effects of Cost-Information Transparency on Intertemporal Price Discrimination (August 21, 2020). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2732812 or http://dx.doi.org/10.2139/ssrn.2732812

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
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HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

K. Sudhir

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Tianxin Zou

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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