We build a theory of second-degree price discrimination under imperfect competition that allows us to study the substitutive role of prices and qualities in increasing sales. A key feature of our model is that consumers are heterogeneously informed about the o↵ers available in the market, which leads to dispersion over price-quality menus in equilibrium. While ﬁrms are ex-ante identical, their menus are ordered so that more generous menus leave more surplus uniformly over consumer types. We generate empirical predictions by exploring the e↵ects of changes in market fundamentals on the distribution of surplus across types, and pricing across products. For instance, more competition may raise prices for low-quality goods; yet, consumers are better o↵, as the qualities they receive also increase. The predictions of our model illuminate empirical ﬁndings in many markets, such as those for cell phone plans, yellow-pages advertising, cable TV and air travel.
Daniel F. Garrett, Renato Gomes, and Lucas Maestri, “Competitive Screening under Heterogeneous Information”, The Review of Economic Studies, vol. 86, 2019, pp. 1590–1630.