DP9397 | Screening-Based Competition

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17/03/2013

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Abstract

We apply a reduced form representation of product market competition, facilitating an explicit characterization of the equilibrium investments in consumer-specific screening. The effects of market structure on screening incentives depend on the microstructure of the imperfect screening technology and on the characteristics of the pool of consumers. We conduct a welfare analysis, which reveals that the microstructure of the screening technology and the characteristics of the pool of consumers determine whether there are private incentives for overinvestment or underinvestment in screening. Furthermore, we show that the introduction of screening competition amplifies market failures associated with screening investments.