Personalized Pricing and Quality Design

We develop an analytical framework to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby firms charge different prices and offer different qualities to different consumers, based on their willingness to pay. We embed PPQ in a model of spatial differentiation, and show how information about consumer preferences affects multi-product firmsÃÂâÃÂÃÂÃÂàchoices over pricing schedules and product line offerings. We show that firmsÃÂâÃÂÃÂÃÂàoptimal pricing strategies with PPQ will be non-monotonic in consumer valuations. Our model sheds light on the different product quality schedules offered by firms, given that one or both firms implement PPQ. Contrary to prior literature on one-to-one marketing, we show that even symmetric firms can avoid the well-known PrisonerÃÂâÃÂÃÂÃÂÃÂs Dilemma problem due to the quality enhancement effect at the individual consumer level. The rent extraction effect due to quality enhancement dominates the adverse effect of price competition. Moreover, this result is stronger when firms have a larger proportion of loyal consumers. When both firms have PPQ, consumer surplus is non-monotonic in valuations such that some low valuation consumers get higher surplus than high valuation consumers. For a wide range of fixed costs, we also demonstrate some results on the profitability of adopting PPQ and show the emergence of asymmetric equilibria, where one firm adopts PPQ and the other firm does not when the number of loyal customers is less than a critical value. We extend our analysis to asymmetric firms and show that when one firm adopts PPQ, it always increases its quality level while the other firm keeps its quality schedule unchanged compared to when neither firm has PPQ. We demonstrate that a firm with an ex-ante, smaller loyal segment can be better off with PPQ.Information Systems Working Papers Serie

Personalized Pricing and Quality Design

We develop an analytical framework to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby rms charge di¤erent prices and o¤er di¤erent qualities to di¤erent consumers, based on their willingness to pay. We embed PPQ in a model of spatial di¤erentiation, and show how information about consumer preferences a¤ects multi-product rms choices over pricing schedules and product line o¤erings. We show that consumer surplus with PPQ will be non-monotonic in consumer valuations. Our model sheds light on the di¤erent product quality schedules o¤ered by rms, given that one or both rms implement PPQ. Contrary to prior literature on one-to-one marketing, we show that even symmetric rms can avoid the well-known Prisoner s Dilemma problem due to the quality enhancement e¤ect at the individual consumer level. The rent extraction e¤ect due to quality enhancement dominates the adverse e¤ect of price competition. Moreover, this result is stronger when rms have a larger proportion of loyal consumers. When both rms have PPQ, consumer surplus is non-monotonic in valuations such that some low valuation consumers get higher surplus than high valuation consumers. We extend our analysis to asymmetric rms and show that when one rm adopts PPQ, it always increases its quality level while the other rm keeps its quality schedule unchanged compared to the case when neither rm has PPQ. We demonstrate that a rm with an ex-ante, smaller loyal segment can be better o¤ with PPQ.NYU, Stern School of Business, IOMS Department, Center for Digital Economy Researc