Revisiting the relationship between competition and price discrimination

Abstract

We revisit the relationship between competition and price discrimination. Theoretically, we show that if consumers differ in terms of both their underlying willingness- to-pay and their brand loyalty, competition may increase price differences between some consumers while decreasing them between others. Empirically, we find that competition has little impact at the top or the bottom of the price distribution but a significant impact in the middle, thus increasing some price differentials but decreasing others. Our findings highlight the importance of understanding the relevant sources of consumer heterogeneity and can reconcile earlier conflicting findings.