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Behavior based price personalization under vertical product differentiation

Author

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  • Paolo Garella

    (Department of Economics, Management and Quantitative Methods (DEMM) - UNIMI - Università degli Studi di Milano = University of Milan)

  • Didier Laussel

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Joana Resende

    (Universidade do Porto = University of Porto)

Abstract

We study price personalization in a two period duopoly with vertically differentiated products. In the second period, a firm not only knows the purchase history of all customers, as in standard Behavior Based Price Discrimination models, but it also collects detailed information on its old customers, using it to engage in price personalization. The analysis reveals that there exists a natural market for each firm, defined as the set of customers that cannot be poached by the rival in the second period. The equilibrium is unique, except when firms are ex-ante almost identical. In equilibrium, only the firm with the largest natural market poaches customers from the rival. This firm has highest profits but not necessarily the largest market share. Aggregate profits are lower than under uniform pricing. All consumers gain, total welfare is higher herein than under uniform pricing if firms' natural markets are sufficiently asymmetric. The low quality firm chooses the minimal quality level and a quality differential arises, though the exact choice for the high quality depends upon the cost specification.

Suggested Citation

  • Paolo Garella & Didier Laussel & Joana Resende, 2021. "Behavior based price personalization under vertical product differentiation," Post-Print hal-03263513, HAL.
    • Handle: RePEc:hal:journl:hal-03263513
    DOI: 10.1016/j.ijindorg.2021.102717
    Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03263513
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    Cited by:

    1. 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).
    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. Okuyama, Suzuka, 2021. "Behavior-based Price Discrimination in the Domestic and International Mixed duopoly," MPRA Paper 110206, University Library of Munich, Germany.
    4. Colombo, Stefano & Graziano, Clara & Pignataro, Aldo, 2024. "Imperfect history-based price discrimination with asymmetric market shares," Information Economics and Policy, Elsevier, vol. 67(C).
    5. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Post-Print hal-03740642, HAL.
    6. Shuilin Liu & Xudong Lin & Xiaoli Huang & Hanyang Luo & Sumin Yu, 2023. "Research on Service-Driven Benign Market with Platform Subsidy Strategy," Mathematics, MDPI, vol. 11(2), pages 1-21, January.
    7. Didier Laussel, 2023. "Do firms always benefit from the presence of active customers?," Post-Print hal-03777069, HAL.
    8. Stefano Colombo & Clara Graziano & Aldo Pignataro, 2021. "History-Based Price Discrimination with Imperfect Information Accuracy and Asymmetric Market Shares," CESifo Working Paper Series 9049, CESifo.
    9. Nakagawa, Akihiko & Matsushima, Noriaki, 2023. "A note on conglomerate mergers: The Google/Fitbit case," Japan and the World Economy, Elsevier, vol. 67(C).
    10. Yue Shen & Weijun Zhong & Shue Mei, 2023. "Advertising strategies of competing firms considering consumer privacy concerns," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2424-2437, June.
    11. 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.
    12. Tulabandhula, Theja & Ouksel, Aris M. & Nguyen, Son The, 2023. "Impact of customer loyalty and differing firm costs on price discrimination in an infinite horizon setting," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 344-377.
    13. Li, Jianpei & Zhang, Wanzhu, 2022. "Behavior-based price discrimination and signaling of product quality," MPRA Paper 111572, University Library of Munich, Germany.
    14. Shuaicheng Liu, 2024. "Privacy regulation in asymmetric environments," Journal of Regulatory Economics, Springer, vol. 66(2), pages 157-173, December.
    15. 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.
    16. 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.
    17. 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.

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