Imperfect Price Discrimination, Market Structure and Efficiency

Abstract

We introduce a flexible framework by modeling the information firms possess about consumers' locations (preferences) on the Salop circle as a partition. Higher information quality is translated into a partition refinement. In the limit, we obtain the perfect price discrimination paradigm. We show that the free-entry equilibrium number of firms exhibits a U-shape as a function of the quality of information. This implies that some (but not too much) price discrimination yields the most efficient non-cooperative outcome.

Keywords: Free-entry, Price discrimination, Market structure, Efficiency

JEL Classification: D43, L11, L43