Price competition for an informed buyer (Q1347825)

In this pretty long and mathematically rigorous paper the authors study a price competition problem involving two sellers offering different quality goods to a buyer who has a private information on their relative quality. The sellers appear to act as local monopolists when a prior belief toward goods is balanced and the information is precise. However, when the prior belief is very biased toward one good, and the buyer's information is not precise, the sellers' behaviours may be modeled by the Bertrand model. The seller's equilibrium profits may decline with the release of public information. It is proved that a dominant seller loses from a higher ex-aute reputation. Finally, the buyer prefers not to be known as one being well informed about the relative quality of the goods.