Third Degree Price Discrimination Under Costly Information Acquisition

TL;DR

This paper examines how costly consumer information affects third-degree price discrimination, revealing complex effects on consumer surplus and social welfare, including scenarios where easier data access benefits consumers.

Contribution

It introduces a model of endogenous market segmentation with costly information acquisition, highlighting non-monotonic effects on consumer surplus and social welfare.

Findings

Consumer surplus can increase or decrease with information costs.

Easier access to consumer data can sometimes benefit consumers.

Social welfare exhibits non-monotonic behavior as information costs change.

Abstract

This paper investigates third-degree price discrimination under endogenous market segmentation. Segmenting a market requires access to information about consumers, and this information comes with a cost. I explore the trade-offs between the benefits of segmentation and the costs of information acquisition, revealing a non-monotonic relationship between consumer surplus and the cost of information acquisition for monopolist. I show that in some markets, allowing the monopolist easier access to customer data can also benefit customers. I also analyzed how social welfare reacts to changes in the cost level of information acquisition and showed that the non-monotonicity result is also valid in social welfare analysis.