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Behavioral Price Discrimination in the Presence of Switching Costs

Author

Listed:
  • Koray Cosguner

    (J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303)

  • Tat Y. Chan

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • P. B. (Seethu) Seetharaman

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

Abstract

We study the strategic impacts of behavioral price discrimination (BPD) on manufacturers and retailers in a distribution channel when there are switching costs in consumer demand. Unlike previous empirical studies of behavioral price discrimination, which rely only on differences in price elasticity across customers , our pricing model allows the firm strategies to additionally account for differences in price elasticity across time (due to switching costs). We estimate a dynamic pricing model using empirical data from the cola category and, through a series of counterfactuals, we find that the retailer should simply outsource the data analytics and customization of coupons to manufacturers and improve its profit beyond what it can achieve by proactively couponing on its own. We further find that serving as an information broker to sell its customer database to manufacturers can be a vital source of profit to the retailer. By contrast, manufacturers end up worse off, illustrating that customer information is a potent source of channel power to the retailer. Finally, we show that simply using customers’ most recent purchase information can significantly impact firms’ profits. BPD based on this information is easy to implement and of low cost to manufacturers and retailers.

Suggested Citation

  • Koray Cosguner & Tat Y. Chan & P. B. (Seethu) Seetharaman, 2017. "Behavioral Price Discrimination in the Presence of Switching Costs," Marketing Science, INFORMS, vol. 36(3), pages 426-435, May.
    • Handle: RePEc:inm:ormksc:v:36:y:2017:i:3:p:426-435
    DOI: 10.1287/mksc.2016.1024
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    References listed on IDEAS

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    Cited by:

    1. Lei Yan & Yuxiang Zhang & Shue Mei & Weijun Zhong, 2024. "Personalized pricing with persuasive advertising and the value of consumer information: a duopoly framework," Electronic Commerce Research, Springer, vol. 24(3), pages 1533-1562, September.
    2. Zhang, Si & Sun, Huijun & Wang, Xu & Lv, Ying & Wu, Jianjun, 2022. "Optimization of personalized price discounting scheme for one-way station-based carsharing systems," European Journal of Operational Research, Elsevier, vol. 303(1), pages 220-238.
    3. Shuaicheng Liu, 2024. "Privacy regulation in asymmetric environments," Journal of Regulatory Economics, Springer, vol. 66(2), pages 157-173, December.
    4. Michel Tolksdorf, 2023. "On Point Predictions and Reference Dependence in Behavior-Based Pricing Experiments," Journal of Economics and Behavioral Studies, AMH International, vol. 15(1), pages 1-14.

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