Competition, Incomplete Discrimination and Versioning

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