Price Competition and the Use of Consumer Data

Abstract

Firms have access to vast amounts of data on consumers, which allows them to strategically vary prices across consumers, i.e. price discriminate. To study the effects of this data on consumer welfare, I develop a Bertrand duopoly model where each consumer's valuation for each firm's good is uncertain. Instead of imposing that firms have access to specific data, I allow for general information structures; firms may vary in the quality and form of their data. Fixing the available data, due to the discontinuities in Bertrand competition, the unique equilibrium is only supported through price dispersion. I directly construct the unique equilibrium by harnessing features of each firm's residual demand curve. In equilibrium, each firm randomizes her price and generates a unit-elastic residual demand for the other firm. I then vary the available data and compare the welfare consequences. In the baseline model, contrary to common concerns regarding price discrimination derived from the monopoly case, under competition, completely public consumer data (perfect price discrimination) is optimal for consumers.