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Limited perception and price discrimination in a model of horizontal product differentiation

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  • Saur, Marc P.
  • Schlatterer, Markus G.
  • Schmitt, Stefanie Y.

Abstract

We analyze the implications of consumers' limited perception in a model of horizontal product differentiation. Consumers with limited perception do not necessarily notice all goods in the market. Limited perception thus offers a market segmentation into consumers who notice only one good and consumers who notice all goods. Our objective is to analyze whether less perception is harmful to consumers when firms use this segmentation to price discriminate. We show that product differentiation under limited perception is less extreme than under full perception. Consequently, despite firms' ability to price discriminate, average prices may be lower under limited than under full perception. In addition, we show that consumer surplus and welfare are not maximized under full perception but increase for some degree of limited perception.

Suggested Citation

  • Saur, Marc P. & Schlatterer, Markus G. & Schmitt, Stefanie Y., 2022. "Limited perception and price discrimination in a model of horizontal product differentiation," Games and Economic Behavior, Elsevier, vol. 134(C), pages 151-168.
    • Handle: RePEc:eee:gamebe:v:134:y:2022:i:c:p:151-168
    DOI: 10.1016/j.geb.2022.04.002
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    More about this item

    Keywords

    Horizontal product differentiation; Hotelling; Perception; Price discrimination;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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