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Competitive screening of customers with non-common priors

Uthemann, Andreas (2017) Competitive screening of customers with non-common priors. Systemic Risk Centre Discussion Papers (73). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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This paper provides an explanation for the variety of contracts offered by competitive firms for seemingly identical products or services. I show that two competing firms offering menus of non-linear price schedules to customers with biased beliefs about their future demand will be able to screen these customers on the basis of their priors. Firms' use of menus of tariffs can thus be understood as screening devices for boundedly rational consumers. However, while such menus allow firms to screen their customers according to their ability to correctly forecast future demand, they do not allow them to extract additional rents provided the market is sufficiently competitive and firms' have identical priors concerning their customers' types. Sufficiently strong competition guarantees that each tariff only covers the fixed costs of the firm. Competition between firms however cannot remedy the bias in consumers' beliefs about their future demand.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2017 The Author
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Date Deposited: 08 Jun 2023 08:51
Last Modified: 16 Sep 2023 00:01

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