A Survey on the Economics of Behaviour-Based Price Discrimination

Economists have long been interested in understanding the profit, consumer surplus and welfare effects of an ancient marketing strategy: Price Discrimination. While it is not new that firms try frequently to segment customers in order to price discriminate, what has dramatically changed, with recent advances in information technologies, is the quality of consumer-specific data now available in many markets and how this information has been used by firms for price discrimination purposes. Specifically, thanks to information technology it is nowadays increasingly feasible for sellers to segment customers on the basis of their purchasing histories and to price discriminate accordingly. This form of price discrimination has been named in the literature as Behaviour-Based Price Discrimination (BBPD). For a long time economists have been concerned in understanding the economic effects of price discrimination in monopolistic markets. However, because imperfect competition is undoubtedly the most common economic setting, recent research on the field has been concerned with the following issues. Firstly, how are profit, consumer surplus and welfare affected when firms practice some form of price discrimination in imperfectly competitive markets? Secondly, in which circumstances may competitive firms have an incentive to price discriminate or rather to avoid it? As we will see, conclusions regarding the profit and welfare effects of price discrimination are strongly dependent upon the form of price discrimination, which in turn depends upon the form of consumer heterogeneity and the different instruments available for price discrimination. Basically, the aim of this survey is to clarify the two aforementioned issues in imperfectly competitive markets.

Price discrimination and targeted advertising: a welfare analysis

We present a monopolistic model of price discrimination by means of targeted informative advertising. Targeting is defined as the ability of the monopolistic to direct messages with differentiated contents to groups of buyers with different valuations for the good. We show that only if targeting is perfect will the monopolistic behave in a socially desirable way.informative advertising, targeting, price discrimination

Competitive Targeted Advertising with Price Discrimination

This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, ?rms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing-mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non-discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.

Price discrimination with private and imperfect information

This paper investigates the competitive and welfare effects of information accuracy improvements in markets where firms can price discriminate after observing a private and noisy signal about a consumer’s brand preference. It shows that firms charge more to customers they believe have a brand preference for them, and that this price has an inverted-U shaped relationship with the signal’s accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signal’s accuracy rises. While industry profit and overall welfare fall monotonically as price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus.COMPETE; QREN; FEDER; Fundação para a Ciência e a Tecnologia (FCT

Pricing with customer recognition

This article studies the dynamic effects of behaviour-base price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. In the static and firs-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.Fundação para a Ciência e a Tecnologia (FCT)

Customer poaching with retention strategies

This paper is a first step in investigating the competitive and welfare effects of behaviourbased price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to raise barriers to switching. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When save activity is allowed forward looking firms anticipate the effect of first period market share on second period profits and so they price more aggressively in the first-period. Thus, first period equilibrium price with BBPD and save activity is below its non-discrimination counterpart. This contrasts with first period price above the non-discrimination level if BBPD is used and save activity is forbidden. Regarding second period prices, retention discounts increase the price offered to those consumers who do not signal am intention to switch. The reverse happens to those consumer who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of behaviour based price discrimination is bad for profits and welfare but good for consumers. However, BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.COMPETE; QREN; FEDER; Fundação para a Ciência e a Tecnologia (FCT

Behavior-based price discrimination with retention offers

This paper is a first step in investigating the competitive and welfare effects of behavior-based price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to avoid the switching of their clientele to a competitor. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When retention strategies are allowed, forward looking fi rms anticipate the effect of fi rst period market share on second period pro fits and price more aggressively in the first-period. Thus,first period equilibrium price under BBPD with retention strategies is below its non discrimination counterpart. This contrasts with fi rst period price above the non-discrimination level if BBPD is used and retention activity is forbidden. Regarding second period prices, the use of retention offers increase the price offered to those consumers who do not signal am intention to switch; the reverse happens to those consumers who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of BBPD is bad for pro fits and welfare but good for consumers. BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.FEDER- Operational Programme for Competitiveness Factors - COMPETEFundação para a Ciência e a Tecnologia (FCT) - PTDC/EGE-ECO/108784/2008, PTDC/EGE-ECO/111558/200

The welfare effects of group and personalized pricing in markets with multi-unit buyers with a decreasing disutility cost in consumption

This paper assesses the welfare effects of firms´ability to use data for group and personalized pricing in markets with unit (q = 1) and multi-unit demand consumers (q > 1). The "disutility cost" of not consuming the ideal good is a function of units purchased and can increase at a decreasing rate β Ꞓ [0,1] as consumption increases ( β is the elasticity of the disutility cost with respect to q): Group pricing (GP) and personalized pricing (PP) are compared to uniform pricing (UP). GP always boosts profits at the expense of consumers. When β = 0,PP reduces industry profits and boosts consumer welfare. The same happens when q is low and/or β is sufficiently high. In contrast, if heterogeneity in demand is sufficiently high and is sufficiently low, PP can enhance profits at the expense of consumer welfare

Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can

WP 08/2021This paper aims to understand under what market conditions, can competing symmetric firms employ personalized pricing as a winning strategy. A key departure of our paper from the literature is that we introduce customer heterogeneity in demand. If firms´ data discloses only vertical information (demand heterogeneity), firms can only employ group pricing. This is always a winning strategy. When data discloses horizontal information (consumer preferences) and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, fi rms can only employ imperfect personalized pricing (IPP). By comparing uniform pricing (UP) with personalized pricing, we show that if the share of high demand customers in the market is greater than the share of low demand consumers, firms are always better off with no discrimination. More importantly, we show that if heterogeneity in purchase quantity is sufficiently high, then personalized pricing can be a winning strategy for all symmetric practice firms. If heterogeneity in consumer value is high and the share of high demand consumers is sufficiently low, in comparison to UP, both firms are better off under IPP. For an intermediate share of high demand consumers, firms can get higher profits under PPP than under UP and IPP.Fundação para a Ciência e Tecnologia (FCT

Pricing with Customer Recognition

This article studies the dynamic effects of behaviour-base price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. In the static and firs-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.