Competitive Sequential Screening

TL;DR

This paper analyzes how early contracting and menu options in a Hotelling duopoly influence competition, consumer lock-in, and surplus, revealing that early contracting can enhance consumer welfare despite inefficiencies.

Contribution

It provides a unique equilibrium characterization of sequential contracting with consumer lock-in and compares its effects to spot pricing and exclusive contracts.

Findings

Early contracting stiffens competition among less informed consumers.

Lock-in leads to inefficient consumption but can increase consumer surplus.

Exclusive contracts further boost consumer surplus by intensifying competition.

Abstract

We study competition between firms that contract with consumers before the consumers fully learn their product preferences. In a Hotelling duopoly, firms screen consumers by offering menus of option contracts. We characterize the unique equilibrium. Consumers select contracts from both firms. Each consumer is endogenously locked into the firm from which he chooses an option with a lower strike price. Lock-in yields inefficient consumption. Yet earlier contracting stiffens competition because less informed consumers are more homogeneous. Sufficiently early contracting raises consumer surplus relative to spot pricing -- reversing the ranking under monopoly. Exclusive contracting further increases consumer surplus by intensifying competition.