Pricing policies in a market with asymmetric information and non-bayesian firms.

Abstract

This article analyses price competition in a two-period duopoly model in which only one firm is aware of the degree of substitutability between products. Using a Hotelling´s model, we analyse the informed firm´s incentive to reveal its private information throughout its price set in period 1, and how it depends on whether firms set their prices simultaneously or sequentially. In this setting, the price set by the informed firm in period 1 reveals the degree of product differentiation when the prior probability of closer substitutes is sufficiently high and the discount factor is sufficiently low. Additionally, when the informed firm sets its price after its rival in a Stackelberg model, the informed competitor´s incentives to use its price in period 1 in order to reveal its private information decrease. Finally, in a Stackelberg model in which the informed firm is the first mover, its price set in period 1 always reveals the degree of product differentiation.