Competition on service markets with unit demand and learning

We analyze competition in service markets with unit demand prone to adverse selection, such as secured lending and car insurance markets. Incumbent firms learn their customers’ types over time and can price discriminate accordingly. We prove existence of a unique set of mixed strategy equilibria where firms randomize prices over a bounded continuous support. Incumbents earn positive rents. Increased competition through firm entry does not benefit customers if firms know portfolio compositions of competitors. If firms only possess information regarding the aggregate industry client composition, horizontal mergers may reduce industry rents, a finding with implications for competition policy in information-intensive industries.