Price discrimination and investment incentives

We examine a model of a monopolist selling to two segments of consumers with different preferences for quality. We show that if the firm is unable to price discriminate between the segments, then there is less investment in quality. We find that both consumer segments, and society overall, may suffer if the firm is unable to price discriminate. We extend the model to duopoly competition, and find that our results still hold.

► We examine firms selling to segments of consumers with different quality preferences. ► We show that if the firms invest less in quality if they cannot price discriminate. ► We find that all consumer segments may suffer if the firms cannot price discriminate. ► We find that the society overall may suffer if the firms cannot price discriminate.