Competition, Incomplete Discrimination and Versioning

CentER Discussion Paper No. 2004-69

26 Pages Posted: 5 Jan 2005

See all articles by Khaled Diaw

Khaled Diaw

Tilburg University - Center for Economic Research (CentER)

Jérôme Pouyet

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Centre for Economic Policy Research (CEPR)

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Date Written: August 2004

Abstract

Producers of software viewers commonly offer basic versions of their products for free while more sophisticated versions are highly priced, thereby, providing less attractive or lower valuations consumers with larger utility levels. We give some foundations to this outcome called versioning. We consider a duopoly in which firms offer differentiated goods to a representative consumer; the buyer has distinct marginal valuations for the quality of the products; each producer perfectly knows the consumers' taste for its own product, but remains uninformed about its taste for the rivals product.

When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm's offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer's rent increases with his valuation for one product and decreases with the valuation for the other product. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents.

The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination, i.e., strategic ignorance of consumers' tastes for the rival brand softens competition.

Keywords: Competition, prices

JEL Classification: L13, D82

Suggested Citation

Diaw, Khaled and Pouyet, Jerome, Competition, Incomplete Discrimination and Versioning (August 2004). CentER Discussion Paper No. 2004-69, Available at SSRN: https://ssrn.com/abstract=606961 or http://dx.doi.org/10.2139/ssrn.606961

Khaled Diaw (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 0 13 466 3339 (Phone)
+31 0 13 466 8001 (Fax)

Jerome Pouyet

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2870 (Phone)
+33 1 4458 2880 (Fax)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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