Competitive Screening Under Heterogeneous Information

Abstract

We study the interplay between informational frictions and second-degree price discrimination. Our theory recognizes that consumers differ in their tastes for quality as well as in the information they possess about available offers, which leads to dispersion over price–quality menus in equilibrium. While firms are ex ante identical, we show that their menus are ordered so that more generous menus leave more surplus to consumers of all valuations. We explore the cross-section of equilibrium menus and variations in market conditions to generate empirical predictions on prices, qualities, and markups across firms, and within a firm’s product line. For instance, more competition may raise prices for low-quality goods; yet, consumers are better off, as the qualities they receive also increase. The predictions of our model illuminate empirical findings in many markets, such as those for cell phone plans, yellow-pages advertising, cable TV, and air travel.

Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets

“…4 Starting with the seminal work by Mussa and Rosen (1978) on monopolistic price discrimination, later work has introduced imperfect competition via both horizontal (Spulber, 1989;Schmidt-Mohr and Villas-Boas, 1999) and vertical differentiation (Stole, 1995) between firms. Motivated by market imperfections that are important from an applied point of view, the newer literature has considered many different settings: Garrett, Gomes, and Maestri (2019) examine competitive screening when agents are heterogeneously informed about the offers available on the market. Attar, Mariotti, and Salanié (2014a) and Attar, Mariotti, and Salanié (2014b) study nonexclusive contracting such that each agent can contract with several principals.…”

Oligopoly under incomplete information: On the welfare effects of price discrimination

“…Part of the difficulty lies in having analytically tractable models of second-degree price discrimination under imperfect competition. This question has been taken up recently by Garrett, Gomes and Maestri (2019), for settings where imperfect competition arises due to imperfect observability of offers by consumers (equivalently, due to "limited consideration sets").…”

“…The next proposition characterizes an ordered equilibrium. 16 Proposition 1 [Equilibrium: Nonlinear Pricing] There exists an ordered equilibrium F * . In this equilibrium, the indirect utilities offered by firms are described by the support schedule…”

Screening and Adverse Selection in Frictional Markets

“…While this model of imperfect competition has been used extensively in both theoretical and empirical work, 8 to the best of our knowledge none of these papers address adverse selection and screening. 9 A recent paper by Garrett et al (2014) exploits the Burdett and Judd (1983) model in an environment with screening contracts and asymmetric information, but the asymmetric information is over the agents' private values. This key difference implies that the role of screening-and how it interacts with imperfect competition-is ultimately very different in our paper and theirs.…”