Price Competition for an Informed Buyer

This paper investigates price competition with private information on the demand side. Two sellers each offer a different variety of a good to a buyer endowed with a private binary signal on their relative quality. The model provides an informational foundation to differentiation in Hotelling's price competition game. Equilibrium comparative statics is performed with respect to the prior belief and the precision of the private information. Competition is fierce when the prior strongly favors one seller and private signals are relatively uninformative. Sellers' equilibrium profits may fall with the revelation of public information and are nonmonotonic in the prior belief. Journal of Economic Literature Classification Numbers: C72, D43, D82, L15. 2001 Elsevier Science