DP13004 Consumer Scores and Price Discrimination

Author(s): Alessandro Bonatti, Gonzalo Cisternas
Publication Date: June 2018
Keyword(s): Consumer Scores, information design, Persistence, price discrimination, Ratchet Effect, signaling, transparency
JEL(s): C73, D82, D83
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13004

A long-lived consumer interacts with a sequence of firms in a stationary Gaussian setting. Each firm relies on the consumer's current score--an aggregate measure of past quantity signals discounted exponentially--to learn about her preferences and to set prices. In the unique stationary linear Markov equilibrium, the consumer reduces her demand to drive average prices below the no-information benchmark. The firms' learning is maximized by persistent scores, i.e., scores that overweigh past information relative to Bayes' rule when observing disaggregated data. Hidden scores--those only observed by firms--reduce demand sensitivity, increase expected prices, and reduce expected quantities.