Prices, profits and market shares of two competing retailers under consumer information asymmetry

Access to consumer information is a key factor in a firm's ability to compete. We assume a duopoly of two firms, where each is located at a different point in a market with a single perishable product. Consumers are assumed to be heterogeneous in their readiness to buy products with different levels of freshness and in their physical distance from each retailer. One retailer among the two (retailer A) has accurate information about the locations of consumers and their sensitivities to freshness (i.e., their distributions). A non-cooperative game is used to model the competition and to develop optimization models for each retailer according to the information they have about consumers. We conclude that lost sales or leftovers on the part of the uninformed retailer are a possible outcome of information asymmetry, even under a deterministic scenario. We show that each of the best response functions is unique and increases with the opponent's price. A pure strategy Nash equilibrium is shown to exist. Through a numerical example, we show that the optimal profit of retailer A increases when the retailer who lacks accurate information (retailer B) assumes that consumers are less sensitive to freshness than they are in reality. This result is interesting, as it shows that the estimations of the uninformed retailer have a significant effect on the competitor's profits.