Niclas Mørch Kongstad

"Uncertainty, Signaling, and Welfare: Behavior-Based Price Discrimination with Incomplete Information"

Abstract

This thesis studies a two-period model of behavior-based price discrimination (BBPD) with incomplete information. In this model, a monopoly can take two types; a price discriminating (a BBPD type) and a nonprice discriminating (a non-BBPD type). Notably, the monopoly type is assumed unobservable to the consumers. Solving the model shows that there always exists a separating equilibrium. In the separating equilibrium the BBPD type charges prices unaffected by the presence of the non-BBPD type, but the non-BBPD type is incentivized to signal its type by decreasing its price. A subsequent welfare analysis shows four main results. First, the profit of the BBPD type is larger than the profit of the non-BBPD type. Second, consumer surplus is highest conditional upon buying from a non-BBPD type as this type charges a lower price. Third, total surplus is highest conditional upon buying from a non-BBPD type. Fourth and last, banning BBPD decreases both consumer and total surplus.

Contact person: Johan Lagerlöf