The Perils of Behavior-Based Personalization

“Behavior-based personalization” has gained popularity in recent years, whereby businesses offer personalized products based on consumers' purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day 1, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day 1, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms' better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs

DOES IT PAY TO SHROUD ADD-ON FEES?

Add-on pricing, also known as drip pricing, is a common practice whereby firms prominently post base prices yet are less forthcoming about add-on prices. Although some consumers find add-on prices before the purchase decision, others only discover the add-on prices later in the purchase process. This paper presents an analytical model predicting the profit and welfare implications of hidden add-on fees. Whereas practitioners posit that hidden add-on pricing benefits firms at the disadvantage of consumers, the consensus from the academic literature is that any gains from hidden add-ons are negated by competition in base prices. This paper has two main preliminary findings. First, it resolves discrepancy between theory and practice by finding a profit improvement effect of hidden add-on prices under circumstances for which prior literature predicts profit irrelevance. In this regard, the model identifies a new mechanism driving the profit-improvement result. Second, it finds when firms can be worse off by having more consumers uninformed of add-on pricing before choosing from which firm to buy. The findings have implications for managers considering hidden add-on pricing as well as policy makers who seek to regulate this practice

Strategic loyalty reward in dynamic price Discrimination

This paper proposes a dynamic model of duopolistic competition under behaviorbased price discrimination with the following property: in equilibrium, a firm may reward its previous customers although long term contracts are not enforceable. A firm can offer a lower price to its previous customers than to its new customers as a strategic means to hamper its rival to gather precise information on the young generation of customers for subsequent profitable behavior-based pricing. The result holds both with myopic and forward-looking, impatient enough consumers.Price discrimination ; Dynamic pricing ; Loyalty reward

Consequences of personalized product recommendations and price promotions in online grocery shopping

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Welfare Implications of Personalized Pricing in Competitive Platform Markets: The Role of Network Effects

This study explores the welfare impact of personalized pricing for consumers in a duopolistic twosided market, with consumers single-homing and developers affiliating with a platform according to their outside option. Personalized pricing, which is private in nature, cannot influence expectations regarding the network sizes, inducing the platforms to offer lower participation fees for developers. Those lower fees increase network benefits for consumers, allowing the platforms to exploit these benefits through personalized pricing. Personalized prices are higher when the network value for developers is high, benefiting competing platforms at the expense of consumers. These findings offer policy insights on personalized pricing

Molecular marketing, personalised information and willingness-to-pay for functional foods: Vitamin D enriched eggs

Increasingly, the health claims made by food products focus on the marketing of specific molecular enrichments. Research exploring consumers’ willingness to pay (WTP) for health claims assumes that individuals hold perfect information on the benefits of the enrichment, and that their valuations depend solely on whether or not they need to improve their health. While health interventions are aimed at individuals at higher health risk, consumers may be unaware of the health risks that they face, limiting the effectiveness of a generic targeting strategy. Using an orthogonal experimental design, we explore the impact of two factors on the WTP for vitamin D enrichment in eggs: whether the information is person-specific or generic; and the presence of a health claim explaining the vitamin D enrichment. Results indicate that it is the provision of information, not the health claim, that influences WTP. Both generic and personalised information lead to similar increases in the WTP for vitamin D enrichment. While we only observe a direct effect of generic information on the WTP for vitamin D enrichment, personal information may also operate by increasing the perceived risk of vitamin D deficiency. Our results support the use of personalised health information during the choice task as a means of increasing the sales of healthy products

Molecular marketing, personalised information and willingness‐to‐pay for functional foods: Vitamin D enriched eggs

Increasingly, the health claims made by food products focus on the marketing of specific molecular enrichments. Research exploring consumers’ willingness to pay (WTP) for health claims assumes that individuals hold perfect information on the benefits of the enrichment, and that their valuations depend solely on whether or not they need to improve their health. While health interventions are aimed at individuals at higher health risk, consumers may be unaware of the health risks that they face, limiting the effectiveness of a generic targeting strategy. Using an orthogonal experimental design, we explore the impact of two factors on the WTP for vitamin D enrichment in eggs: whether the information is person-specific or generic; and the presence of a health claim explaining the vitamin D enrichment. Results indicate that it is the provision of information, not the health claim, that influences WTP. Both generic and personalised information lead to similar increases in the WTP for vitamin D enrichment. While we only observe a direct effect of generic information on the WTP for vitamin D enrichment, personal informa- tion may also operate by increasing the perceived risk of vitamin D deficiency. Our results support the use of personalised health information during the choice task as a means of increasing the sales of healthy products