Good Data and Bad Data: The Welfare Effects of Price Discrimination

Abstract

We study how a monopolist's use of consumer data for price discrimination affects welfare. To answer this question, we develop a model of market segmentation subject to residual uncertainty. We fully characterize when data usage monotonically increases or decreases welfare or when the effect is non-monotone. The characterization reduces the problem to one with only two demand curves, and gives a condition for the two-demand-curves case that highlights that information affects welfare in three distinct ways. In the non-monotone case, we provide tight bounds on the welfare effects of information and identify the best local direction for providing additional information.