2nd Degree Price Discrimination.

why is adverse selection a problem here?

• consumers differ in valuation.

• firm cannot observe type.

• types are private information.

• must use quality/price menus to screen them.

• consumers end up self selecting their true price.

what is the pooling equilibrium and why does it occur?

• where different types of consumers all choose the same option, so the uninformed party cannot tell them apart.

• high valuation now buys the low quality option as they pay less and still get utility from it.

• they mimic the low type.

• consumers don’t reveal their true type.

what is the full information benchmark?

• if firms can see types.

• experts get high quality.

• novices get low quality.

• everyone pays their exact willingness to pay.

what does the firm choose to do with exogenous qualities?

same price for low valuation novices.

reduced high quality price so high valuation novices prefer it over the low quality option. INFORMATION RENT.

what are the constraints that need to be satisfied in the packages?

participation: each consumer type must get positive surplus, otherwise they would stop consuming.

incentive compatibility constraint: each consumer must prefer their own product.

when does the firm choose to drop the low quality option?

• when there are many high valuation consumers, the cost of serving low valuation consumers becomes too high as the information rent is massive.

what does the endogenous qualities model change?

• the firm now chooses the quality levels themselves.

• they distort the quality of low quality down. QUALITY DEGRADATION.

• makes it unattractive to high valuation consumers.

• prevents them from mimicking.

The firm still must offer a small information rent to the high valuation consumers and leave them some surplus.

what are the welfare effects?

• low quality is distorted down, allocative efficiency.

• transfer from firm to high valuation consumer in the form of an information rent. no DWL but just changes who gets the surplus.

• monopolist’s may choose to stop serving low valuation consumers.