Cost-Information Transparency and Intertemporal Pricing

Abstract

A firm’s cost of its products is increasingly transparent to consumers as third parties publish such information. Cost transparency stymies the ability of low-cost firms to intertemporally price discriminate as consumers now correctly anticipate their future price drops and delay purchases as it is no longer feasible to pool price with the high-cost firms. Using a dynamic model with forward-looking consumer choice and firm pricing, the paper assesses how cost transparency impacts the firm’s pricing strategy and the resultant impact on consumer surplus and firm profits. Cost transparency narrows the profit differential between the low-cost and high-cost firms. We show that, interestingly, cost transparency can hurt both consumers and low-cost firms ex post. However, in expectation, cost transparency leads to a win-win for both the firm and consumers, which implies that cost transparency can foster new product innovation investment by firms. Finally, we consider future price drops arising from potential future entry and find that the profit can be independent of the firm’s cost for a range of cost values.