Selling to Consumers with Intransitive Indifference*

We are indifferent between two cups of coffee when one differs from the other in having only one more grain of sugar. But such an indifference is not transitive, because eventually, after many enough grains of sugar are added, we will become able to tell one cup is sweeter than the other. When consumers feature intransitive indifference, putting a bad deal alongside a good deal can boost the sale of the latter by helping consumers to better appreciate it. When sellers compete for these consumers, they tend not to undercut each other, because undercutting often go un-appreciated. Instead, sellers segregate into providers of good deals and bad deals, with the formers free-riding the latters in helping consumers better appreciate their good deals, and the latters free-riding the formers in making consumers less hesitant to buy. keywords: intransitive indifference, monopoly pricing, price dispersion, oligopoly jel classifications: D91, D40, L10, M31 *We thank Atila Abdulkadiroglu, Attila Ambrus, Heski Bar-Issac, Gabriel Carroll, Jimmy Chan, Jiahua Che, Faruk Gul, Yuichiro Kamada, Chia-hui Lu, Mike Peters, Luca Rigotti, Marzena Rostek, Maria SáezMarti, Curtis Taylor, and participants at various seminars and conferences for very helpful discussion. The work described in this paper was partially supported by the Research Grants Council of Hong Kong (GRF 14500514).