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Competitive Sequential Screening

Ian Ball, Deniz Kattwinkel, Jan Knoepfle

TL;DR

This paper develops a competitive sequential screening model in which two horizontally differentiated firms offer menus of option contracts before consumers learn their exact product preferences. Consumers multi-home across contracts in period 1 but pick a single product in period 2, creating endogenous lock-in and drag on consumption; the main result is an essentially unique equilibrium where strike prices are driven above monopolistic levels, and early contracting can improve consumer welfare despite distortions. The authors compare alongside spot pricing, exclusive contracting, and a multi-product monopoly, showing that contracting early generally boosts consumer surplus and exclusive contracting can further enhance welfare by sharpening competition. The analysis provides a novel link between pre-exchange contract design, information rents, and competitive outcomes in a Hotelling framework, with implications for regulatory policies around subscriptions and exclusive arrangements.

Abstract

Two horizontally differentiated firms compete for consumers who are partially informed about their future preferences. The firms screen consumers by offering menus of option contracts. Each consumer enters contracts with both firms. Subsequently, each consumer learns his preferences and purchases only one product. We find the unique equilibrium. Relative to spot pricing, consumption is distorted because each consumer is endogenously locked into one firm. If contracting is sufficiently early, so that consumers are less informed and hence less differentiated, consumers benefit; this reverses the conclusion in the monopoly case. Exclusive contracting further benefits consumers by intensifying competition.

Competitive Sequential Screening

TL;DR

This paper develops a competitive sequential screening model in which two horizontally differentiated firms offer menus of option contracts before consumers learn their exact product preferences. Consumers multi-home across contracts in period 1 but pick a single product in period 2, creating endogenous lock-in and drag on consumption; the main result is an essentially unique equilibrium where strike prices are driven above monopolistic levels, and early contracting can improve consumer welfare despite distortions. The authors compare alongside spot pricing, exclusive contracting, and a multi-product monopoly, showing that contracting early generally boosts consumer surplus and exclusive contracting can further enhance welfare by sharpening competition. The analysis provides a novel link between pre-exchange contract design, information rents, and competitive outcomes in a Hotelling framework, with implications for regulatory policies around subscriptions and exclusive arrangements.

Abstract

Two horizontally differentiated firms compete for consumers who are partially informed about their future preferences. The firms screen consumers by offering menus of option contracts. Each consumer enters contracts with both firms. Subsequently, each consumer learns his preferences and purchases only one product. We find the unique equilibrium. Relative to spot pricing, consumption is distorted because each consumer is endogenously locked into one firm. If contracting is sufficiently early, so that consumers are less informed and hence less differentiated, consumers benefit; this reverses the conclusion in the monopoly case. Exclusive contracting further benefits consumers by intensifying competition.
Paper Structure (70 sections, 24 theorems, 231 equations, 5 figures)

This paper contains 70 sections, 24 theorems, 231 equations, 5 figures.

Table of Contents

  1. Introduction
  2. Related literature
  3. Model
  4. Setting
  5. Environment
  6. Information
  7. Contracting
  8. Timing
  9. Payoffs
  10. Equilibrium
  11. Discussion
  12. Repeated consumption
  13. The class of contracts
  14. Production costs
  15. Warm-up: Single firm
  16. ...and 55 more sections

Key Result

Proposition 1

Suppose that firm $B$ is a monopolist. Firm $B$'s uniquely optimal mechanism is implemented by the following profile, $(s_B^M, p_B^M, q_B^M)$. Let $\bar{p}_B^M = 1 / g(\underaccent{\bar{}}{\gamma})$.

Figures (5)

  • Figure 1: Consumer's valuations along the Hotelling line
  • Figure 2: Equilibrium with the uniform type distribution
  • Figure 3: Exclusive equilibrium allocation with the uniform type distribution
  • Figure 4: Limiting equilibrium under early contracting
  • Figure 5: Consumer utility functions in the three competitive settings, with uniform type distribution and normally distributed taste shock

Theorems & Definitions (26)

  • Definition 1: Consumer best response
  • Definition 2: Equilibrium
  • Proposition 1: Single-firm solution
  • Theorem 1: Equilibrium characterization
  • Proposition 2: Spot pricing
  • Proposition 3: Exclusive contracting
  • Proposition 4: Efficiency
  • Proposition 5: Multi-product monopolist
  • Proposition 6: Multi-product monopoly surplus
  • Proposition 7: Early contracting
  • ...and 16 more