Price Discrimination in a Market with Uninformed Consumer Preferences

Abstract

We study the price discrimination problem when consumers have uninformed preferences – imperfect prior knowledge about their match values with the firm’s product. Each consumer receives a private noisy signal that is correlated with her value. If the firm can collect and aggregate these signals, it is able to learn beyond the consumer’s private knowledge. This confounds the monopolist’s ability to extract differential surpluses, because consumers may under-estimate their value. We show that the firm can effectively price discriminate, but it requires the firm to signal to consumers through personalized prices and a list price. Several novel results arise from this setting: (i) under certain conditions, uniform pricing is more profitable than price discrimination; (ii) the optimal uniform price can decrease with the portion of consumers whose value is higher than others; (iii) relative to uniform pricing, price discrimination may be a strong Pareto improvement, strictly increasing the payoff for the firm and every consumer.