When Price Discrimination Fails – A Principal Agent Problem with Social Influence

I develop a theoretical model of price discrimination under social influence. I find that social influence gives sellers the incentive to artificially create and maintain excess demand on the market. The rationing occurs mainly at the low end of the market and sometimes results in full rationing of the low end. Furthermore, the incidence of price discrimination under social influence is much lower than in the absence of it. Social influence lowers the profitability of price discrimination and incentivizes sellers to reduce product variety and to only target the high end of the market, a fact that is consistent with many empirical observations. Copyright © 2015 John Wiley & Sons, Ltd.