Australasian Microeconomic Theory Seminar - Laura Doval (Columbia Business School)

Title:  Product Line Design with Limited Commitment

Abstract: We consider a setting in which a firm cannot only choose prices it can also optimally design the degree of product personalization. The firm conditions future terms of trade on the history of purchases which now include a variety choice. Controlling the degree of product personalization provides the firm an additional tool to curb ratcheting forces arising from consumers’ awareness of being price discriminated. Indeed, we find that the firm engages in strategic elimination of product varieties. Doing so gives commitment power to the firm: By ‘pooling’ consumers with different tastes to the same variety the firm commits not to learn their tastes. Interestingly, however, in some cases the firm optimally designs fully revealing product menus for low and very high valuations, while it pools very low and intermediate ones.