Competitive Personalized Pricing

Abstract

We study a model where each competing firm has a target segment on which it has full consumer information and can exercise personalized pricing, and consumers can engage in identity management that allows them to bypass the firm's attempt to price discriminate. More consumer information can intensify competition since firms can effectively defend their turf through targeted personalized offers, which allows them to set aggressive public prices offered to non-targeted consumers. But the effect can be mitigated as more consumers become active in identity management since it raises the firm's cost of serving non-targeted consumers. When firms have sufficiently large and non-overlapping target segments, active identity management by consumers can enable firms to extract full surplus from their targeted consumers through perfect price discrimination. Active identity management can also induce firms not to serve the entire market when the commonly non-targeted market segment is small, hence resulting in a deadweight loss. Thus active identity management by consumers can lead to lower consumer surplus and lower social welfare. Our main insight continues to be valid when a fraction of consumers are active in identity management or when there is a cost of identity management. We also discuss the regulatory implications for the use of consumer information by firms as well as the implications for management.

Key words: Personalized pricing, identity management, customer targeting

JEL Classification: D43, D8, L13, L5

About the presenter's visit

Dr Chongwoo Choe will be visiting the School of Economics on 2.4.19.. While here he will be using room 520A Colin Clark Building. If you would like to meet with Dr Choe or have lunch or dinner with him please contact A/Prof Heiko Gerlach who will be his host while at The University of Queensland. A/Prof Heiko Gerlach can be contacted on h.gerlach@uq.edu.au.