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The curse of knowledge: having access to customer information can reduce monopoly profits
Author(s) -
Laussel Didier,
Long Ngo V.,
Resende Joana
Publication year - 2020
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12336
Subject(s) - monopoly , curse , profit (economics) , business , microeconomics , markov chain , economics , marketing , industrial organization , computer science , sociology , anthropology , machine learning
We show that a monopolist's profit is higher if he refrains from collecting coarse information on his customers, sticking to constant uniform pricing rather than recognizing customers' segments through their purchase history. In the Markov perfect equilibrium with coarse information collection, after each commitment period, a new introductory price is offered to attract new customers, creating a new market segment for price discrimination. Eventually, the whole market is covered. Shortening the commitment period results in lower profits. These results sharply differ from the ones obtained when the firm can uncover the exact willingness‐to‐pay of each previous customer.