The School of Economics invites you to an Economic theory seminar presented by Ngo Van Long (McGill University).

The Curse of Knowledge: Having Access to Customer Information Can Reduce Monopoly Profit

Abstract 

We demonstrate the “curse of knowledge” when a monopolist can recognize different consumer groups by collecting information on their purchase history (PHI for short) which are influenced by its dynamic pricing policies. The firm’s output is homogeneous, and each consumer purchases at most one unit of the good per unit of time. Consumers are heterogeneous in terms of their maximum willingness to pay for the good. In this model the firm’s technology is such that it cannot produce goods with varying quality levels. Thus, with only one good, the monopolist can only practice third-degree price discrimination across consumer groups and across time. Under the Markov-perfect equilibrium, after each commitment period, the firm offers a new introductory price so as to attract new customers. More and more market segments are added gradually. Eventually, the whole market is covered. We show that, under third- degree price discrimination, a shortening of the commitment period will result in a fall in monopoly profit. In contrast, a full-commitment monopolist would choose to stick to uniform pricing, achieving higher profit. Hence, the firm is better off by refraining from collecting customers’ purchase history information (PHI). Finally, we compare the results of the PHI case with those that would be obtained if the monopolist can collect much finer information (full information acquisition case, or FIA, for short).