Price dynamics of vertically differentiated information markets
We e@ore the price dynamicsof a verticallyMkmntiated marketin which two or more sellers compete to providean informationgood orserviceto a populationof lmyers.Each sellerofh-s the good or serviceat a iixed levd of “quality”, and attempts to set its price in sud a way that it mtities its om profit. Five dii%rentsellerpricingstrategies, rangingwidelyfrom onesthat requireperfectknowledgeand unlimitedcomputationalpowerto onesthat requireverylittle lmowledgeor computationalcapability,are employedin two d.ifkmntbuyer populations, and the resulting collective dynamics are studied using a comb-mationof analysis and simulation. In a population of quality-sensitivebuyers, all pricing strategieslead to a ptice eqpilibriutnpredictedby a game-theoreticanalysis. However,in a population of price-sensitivebuyers,most pricingstrategieslead to large-amplitudecyclicalprice wars. The circumstancesunderwhichcyclicalpricewarsoccurcanbe explainedin terms of the topology of an underlying’>rofit landscape” [1].