Renato Gomes (TSE)

“Brand Loyalty and Quality Provision in Oligopolistic Price Discrimination”

jointly with  Jean-Marie Lozachmeur and  Lucas Maestri

Abstract: We study oligopolistic competition by firms engaging in second-degree price discrimination. In line with the large empirical literature on demand estimation, our theory allows for comovements between consumers’ tastes for quality and brand substitution. If the propensity of low-type consumers to switch brands is small (large) relative to that of high types, (i) quality provision is inefficiently low at the bottom (high at the top) of the product line, and (ii) relative to the complete information benchmark, high types loose (gain), while low types gain (loose) from asymmetric information. We develop a number of testable comparative statics on pricing and quality provision: For instance, quality levels increase (decrease) as brand preferences become more intense among consumers with low (high) tastes for quality. Interestingly, pure-strategy equilibria fail to exist for a wide range of parameters. Accordingly, our theory identifies a new rationale for price/quality dispersion; namely, the interplay between self-selection constraints and heterogeneity in brand loyalty.