Effects of Cost‐Information Transparency on Intertemporal Price Discrimination

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 study 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 incentives 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.

Dynamic Pricing and Price Commitment of New Experience Goods

“…The problem is more severe in a multi‐period dynamic signaling setting, where in some parameter regions the intuitive criterion refinement (Cho and Kreps 1987) still leaves infinitely many possible equilibria. To further refine equilibrium outcomes, we apply the lexicographically maximum sequential equilibrium (LMSE) concept introduced by Mailath et al., (1993), which is often used as an alternative equilibrium‐selection criterion (e.g., Jiang et al., 2014, Jiang et al., 2020, Taylor 1999). Below we adapt the definition of LMSE to our setting.…”

The Impact of Algorithmic Price Discrimination on Consumers’ Perceived Betrayal

“…Extant literature shows that price discrimination occurs at three levels. First-degree discrimination, which is focused on customers’ willingness to pay, is employed by many firms in the retailing sector to maximize revenue (e.g., Hinz et al, 2011 ; Jiang et al, 2020 ; Liu et al, 2020 ). For example, Hinz et al (2011) reveal that the use of a name-your-own-price (NYOP) mechanism can increase profits and transactions and that an adaptive threshold price can increase profits by over 20% without decreasing customer satisfaction.…”

Optimal ordering decision and information leakage preference under asymmetric forecast signal

“…Based on the results we solved above, for the incumbent, we find that there are multiple equilibria in our model setting when (1−θ)τ 2−3θ−θ 2 < ∆ < τ 2+θ , this indicates that we need to find the optimal equilibrium outcome. So that, we use LMSE (Lexicographically Maximum Sequential Equilibrium) concept to find such a unique outcome (see Mailath et al 1993), the LMSE concept has been widely used as one of the multiple equilibria selection criterion (such as Guo and Zhang 2017;Jiang et al 2016Jiang et al , 2020, thus, it is also adapted in our setting. The unique and optimal equilibrium result is summarized in Proposition 1, the relevant proof is given in appendix.…”