Competition under Informational Head-Starts

In many markets incumbents know more about consumers they sold to than potential entrants. In a two period Hotelling framework, I examine how a monopolist can use first-period pricing to shape its information advantage and thereby influence entry and subsequent competition. The information gathered allows the incumbent to price discriminate in the second period. The monopolist shapes her informational head start: whenever possible it deters entry by gathering more information through lower prices in the first period. If not possible the incumbent uses higher prices as a commitment device to weaken competition in the second period. Different policy could be adopted to promote welfare in such a setting. I show under what conditions a ban of price discrimination increases welfare. Motivated by antitrust policies, I investigate the effect of an information sharing requirement where the incumbent has to share its private information. If not anticipated this policy promotes entry and increases welfare.