IDEAS home Printed from https://ideas.repec.org/a/eee/jomega/v118y2023ics0305048323000348.html
   My bibliography  Save this article

Which is better for competing firms with quality increasing: behavior-based price discrimination or uniform pricing?

Author

Listed:
  • Wang, Yu
  • Li, Minqiang
  • Feng, Haiyang
  • Feng, Nan

Abstract

With the prevalence of subscription service model (i.e. Software-as-a-service, SaaS), firms are able to continuously improve their service quality online. Besides, subscribers need to renew their services after each subscription period, which provides more convenience for firms to implement behavior-based price discrimination (BBPD), namely, charging different prices for the repeat customers and for the rival's customers. Firms can respond to the rival's BBPD by adopting BBPD or by adopting uniform pricing (UP) and with a higher service quality. In this paper, we study the choices of competing firms’ pricing strategies in a two-period duopoly market when both firms can improve their quality in the second period. We consider firms’ asymmetric capability to improve their service quality and find that this asymmetry plays a critical role in determining firms’ pricing strategies. With exogenous quality improvement levels, we find that when two firms’ quality improvement difference is small, multiple equilibria prevail, namely, both adopt BBPD or both adopt UP in equilibrium. When the quality improvement difference is moderate, the asymmetric case where the disadvantaged firm adopts BBPD while the advantaged one adopts UP prevails in equilibrium, which is a unique finding absent in the previous literature. When the quality improvement difference is large, both firms will adopt UP in equilibrium, but both firms can be better off by adopting BBPD when the quality improvement difference exceeds a threshold, which is a win-win situation but a prisoner's dilemma game different from the previous studies. By examining industry profit, consumer surplus and social welfare, we find that firms’ interests are usually not aligned with the social planner's interests, and the social planner's interests are not always aligned with consumers’ interests. With endogenous quality improvement choices, the firm with R&D cost advantage tends to make a greater quality improvement, and the asymmetric case where firms adopt different pricing strategies disappears due to the impact of endogeneity of quality improvement. More specifically, when the R&D efficiency difference is small or moderate, both firms will adopt either BBPD or UP in equilibrium; but when two firms’ R&D efficiency difference is large, both firms will tend to adopt only UP in equilibrium. Comparing with the case under exogenous quality improvement levels, the social planner's interests are better aligned with the overall industry's interests but are worse aligned with consumers’ interests.

Suggested Citation

  • Wang, Yu & Li, Minqiang & Feng, Haiyang & Feng, Nan, 2023. "Which is better for competing firms with quality increasing: behavior-based price discrimination or uniform pricing?," Omega, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:jomega:v:118:y:2023:i:c:s0305048323000348
    DOI: 10.1016/j.omega.2023.102870
    as

    Download full text from publisher

    File URL: https://www.sciencedirect.com/science/article/pii/S0305048323000348
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.omega.2023.102870?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ashish Arora & Jonathan P. Caulkins & Rahul Telang, 2006. "Research Note--Sell First, Fix Later: Impact of Patching on Software Quality," Management Science, INFORMS, vol. 52(3), pages 465-471, March.
    2. Amit Pazgal & David Soberman, 2008. "Behavior-Based Discrimination: Is It a Winning Play, and If So, When?," Marketing Science, INFORMS, vol. 27(6), pages 977-994, 11-12.
    3. Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
    4. Rodrigo Montes & Wilfried Sand-Zantman & Tommaso Valletti, 2019. "The Value of Personal Information in Online Markets with Endogenous Privacy," Management Science, INFORMS, vol. 65(3), pages 1342-1362, March.
    5. Wu, Jie & Xu, Guangcheng & Zhu, Qingyuan & Zhang, Chaochao, 2021. "Two-stage DEA models with fairness concern: Modelling and computational aspects," Omega, Elsevier, vol. 105(C).
    6. De Giovanni, Pietro & Zaccour, Georges, 2019. "Optimal quality improvements and pricing strategies with active and passive product returns," Omega, Elsevier, vol. 88(C), pages 248-262.
    7. Mahmood Pedram & Subramanian Balachander, 2015. "Increasing Quality Sequence: When Is It an Optimal Product Introduction Strategy?," Management Science, INFORMS, vol. 61(10), pages 2487-2494, October.
    8. Zhijun Chen & Chongwoo Choe & Noriaki Matsushima, 2020. "Competitive Personalized Pricing," Management Science, INFORMS, vol. 66(9), pages 4003-4023, September.
    9. Tang, Yao & Chen, Rachel R. & Guan, Xu, 2021. "Daily-deal market with consumer retention: Price discrimination or quality differentiation," Omega, Elsevier, vol. 102(C).
    10. Li, Tingting & Chen, Junlin, 2020. "Alliance formation in assembly systems with quality-improvement incentives," European Journal of Operational Research, Elsevier, vol. 285(3), pages 931-940.
    11. Juanjuan Zhang, 2011. "The Perils of Behavior-Based Personalization," Marketing Science, INFORMS, vol. 30(1), pages 170-186, 01-02.
    12. Wu, Xingli & Liao, Huchang, 2023. "Value-driven preference disaggregation analysis for uncertain preference information," Omega, Elsevier, vol. 115(C).
    13. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    14. Kutsal Doğan & Yonghua Ji & Vijay S. Mookerjee & Suresh Radhakrishnan, 2011. "Managing the Versions of a Software Product Under Variable and Endogenous Demand," Information Systems Research, INFORMS, vol. 22(1), pages 5-21, March.
    15. Garella, Paolo G. & Laussel, Didier & Resende, Joana, 2021. "Behavior based price personalization under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    16. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2018. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Management Science, INFORMS, vol. 64(12), pages 5669-5687, December.
    17. Amit Mehra & Ram Bala & Ramesh Sankaranarayanan, 2012. "Competitive Behavior-Based Price Discrimination for Software Upgrades," Information Systems Research, INFORMS, vol. 23(1), pages 60-74, March.
    18. Jose A. Guajardo & Morris A. Cohen & Serguei Netessine, 2016. "Service Competition and Product Quality in the U.S. Automobile Industry," Management Science, INFORMS, vol. 62(7), pages 1860-1877, July.
    19. Krista J. Li & Sanjay Jain, 2016. "Behavior-Based Pricing: An Analysis of the Impact of Peer-Induced Fairness," Management Science, INFORMS, vol. 62(9), pages 2705-2721, September.
    20. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Post-Print hal-03740642, HAL.
    21. Heesche, Emil & Asmild, Mette, 2022. "Incorporating quality in economic regulatory benchmarking," Omega, Elsevier, vol. 110(C).
    22. Niladri B. Syam & Ranran Ruan & James D. Hess, 2005. "Customized Products: A Competitive Analysis," Marketing Science, INFORMS, vol. 24(4), pages 569-584, February.
    23. Jiwoong Shin & K. Sudhir, 2010. "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?," Marketing Science, INFORMS, vol. 29(4), pages 671-689, 07-08.
    24. J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
    25. Ki-Eun Rhee & Raphael Thomadsen, 2017. "Behavior-Based Pricing in Vertically Differentiated Industries," Management Science, INFORMS, vol. 63(8), pages 2729-2740, August.
    26. Zan Zhang & Guofang Nan & Minqiang Li & Yong Tan, 2022. "Competitive Entry of Information Goods Under Quality Uncertainty," Management Science, INFORMS, vol. 68(4), pages 2869-2888, April.
    27. Fan, Ming & Kumar, Subodha & Whinston, Andrew B., 2009. "Short-term and long-term competition between providers of shrink-wrap software and software as a service," European Journal of Operational Research, Elsevier, vol. 196(2), pages 661-671, July.
    28. Zhang, Yu & Huang, Min & Tian, Lin & Cai, Gangshu George & Jin, Delong & Fan, Zhiping, 2023. "Manufacturer’s product line selling strategy and add-on policy in product sharing," European Journal of Operational Research, Elsevier, vol. 308(3), pages 1332-1343.
    29. Zan Zhang & Guofang Nan & Yong Tan, 2020. "Cloud Services vs. On-Premises Software: Competition Under Security Risk and Product Customization," Information Systems Research, INFORMS, vol. 31(3), pages 848-864, September.
    30. Guo, Shu & Choi, Tsan-Ming & Chung, Sai-Ho, 2022. "Self-design fun: Should 3D printing be employed in mass customization operations?," European Journal of Operational Research, Elsevier, vol. 299(3), pages 883-897.
    31. Jia, Kunhao & Liao, Xiuwu & Feng, Juan, 2018. "Selling or leasing? Dynamic pricing of software with upgrades," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1044-1061.
    32. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
    33. Zhang, Chu & Zheng, Xiaona, 2021. "Customization strategies between online and offline retailers," Omega, Elsevier, vol. 100(C).
    34. Basu, Sumanta & Chakraborty, Soumyakanti & Sharma, Megha, 2015. "Pricing cloud services—the impact of broadband quality," Omega, Elsevier, vol. 50(C), pages 96-114.
    35. Dan Ma & Abraham Seidmann, 2015. "Analyzing Software as a Service with Per-Transaction Charges," Information Systems Research, INFORMS, vol. 26(2), pages 360-378, June.
    36. Donald E. Harter & Sandra A. Slaughter, 2003. "Quality Improvement and Infrastructure Activity Costs in Software Development: A Longitudinal Analysis," Management Science, INFORMS, vol. 49(6), pages 784-800, June.
    37. Xiao, Yujie & Niu, Wenju & Zhang, Lianmin & Xue, Weili, 2023. "Store brand introduction in a dual-channel supply chain: The roles of quality differentiation and power structure," Omega, Elsevier, vol. 116(C).
    38. Akturk, M. Serkan & Ketzenberg, Michael & Yıldız, Barış, 2021. "Managing consumer returns with technology-enabled countermeasures," Omega, Elsevier, vol. 102(C).
    39. Krista J. Li, 2018. "Behavior-Based Pricing in Marketing Channels," Marketing Science, INFORMS, vol. 37(2), pages 310-326, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peng, Shuxia & Li, Bo & Zheng, Wei, 2024. "Impact of consumer valuation updating in a competitive software market," Omega, Elsevier, vol. 123(C).
    2. Zhang, Yingdan & Yang, Ruina & Yi, Zelong & Yao, Shiqing & Jing, Yiheng, 2023. "Behavior-Based pricing under asymmetric channel competition with strategic consumers," Omega, Elsevier, vol. 120(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tao Wang & Shi-Xiao Wang, 2022. "International Manufacturer’s Online Marketplace Choice Considering Behavior-Based Pricing," Sustainability, MDPI, vol. 14(21), pages 1-18, November.
    2. Choe, Chongwoo & Matsushima, Noriaki & Tremblay, Mark J., 2022. "Behavior-based personalized pricing: When firms can share customer information," International Journal of Industrial Organization, Elsevier, vol. 82(C).
    3. Bruno Jullien & Markus Reisinger & Patrick Rey, 2023. "Personalized Pricing and Distribution Strategies," Management Science, INFORMS, vol. 69(3), pages 1687-1702, March.
    4. Zhijun Chen & Chongwoo Choe & Noriaki Matsushima, 2020. "Competitive Personalized Pricing," Management Science, INFORMS, vol. 66(9), pages 4003-4023, September.
    5. Zan Zhang & Guofang Nan & Minqiang Li & Yong Tan, 2022. "Competitive Entry of Information Goods Under Quality Uncertainty," Management Science, INFORMS, vol. 68(4), pages 2869-2888, April.
    6. Chongwoo Choe & Noriaki Matsushima, 2021. "Behavior-Based Price Discrimination and Product Choice," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(2), pages 263-273, March.
    7. Dubus, Antoine, 2024. "Behavior-based algorithmic pricing," Information Economics and Policy, Elsevier, vol. 66(C).
    8. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2018. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Management Science, INFORMS, vol. 64(12), pages 5669-5687, December.
    9. Flavio Pino, 2022. "The microeconomics of data – a survey," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 635-665, September.
    10. Jia, Kunhao & Liao, Xiuwu & Feng, Juan, 2018. "Selling or leasing? Dynamic pricing of software with upgrades," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1044-1061.
    11. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Management Science, INFORMS, vol. 68(12), pages 8872-8888, December.
    12. Bing Jing, 2017. "Behavior-Based Pricing, Production Efficiency, and Quality Differentiation," Management Science, INFORMS, vol. 63(7), pages 2365-2376, July.
    13. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Post-Print hal-03740642, HAL.
    14. Bita Hajihashemi & Amin Sayedi & Jeffrey D. Shulman, 2022. "The Perils of Personalized Pricing with Network Effects," Marketing Science, INFORMS, vol. 41(3), pages 477-500, May.
    15. Didier Laussel & Ngo Van Long & Joana Resende, 2023. "Profit Effects of Consumers’ Identity Management: A Dynamic Model," Management Science, INFORMS, vol. 69(6), pages 3602-3615, June.
    16. Qiaowei Shen & J. Miguel Villas-Boas, 2018. "Behavior-Based Advertising," Management Science, INFORMS, vol. 64(5), pages 2047-2064, May.
    17. Xuan Wang & Chi To Ng, 2020. "New retail versus traditional retail in e-commerce: channel establishment, price competition, and consumer recognition," Annals of Operations Research, Springer, vol. 291(1), pages 921-937, August.
    18. Wei, Yuansheng & Huang, Pei, 2019. "A model of product compatibility introduction with consumer recognition," International Journal of Research in Marketing, Elsevier, vol. 36(4), pages 613-629.
    19. Jiwoong Shin & K. Sudhir & Dae-Hee Yoon, 2012. "When to "Fire" Customers: Customer Cost-Based Pricing," Management Science, INFORMS, vol. 58(5), pages 932-947, May.
    20. Bernard Caillaud & Romain De Nijs, 2014. "Strategic Loyalty Reward in Dynamic Price Discrimination," Marketing Science, INFORMS, vol. 33(5), pages 725-742, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jomega:v:118:y:2023:i:c:s0305048323000348. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.