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

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  • Esteves, Rosa-Branca

Abstract

This paper assesses the profit effects of Personalized Pricing (PP) in markets where businesses face consumers, who are heterogeneous in terms of preferences for firms/stores (horizontal dimension) and purchase quantity (vertical dimension). If firms’ data discloses only vertical information, firms can only employ group pricing. This is always a winning strategy. When data discloses horizontal and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, firms 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 PP can indeed be a winning strategy for all symmetric discriminating 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.

Suggested Citation

  • Esteves, Rosa-Branca, 2022. "Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:indorg:v:85:y:2022:i:c:s0167718722000509
    DOI: 10.1016/j.ijindorg.2022.102874
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    Citations

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    Cited by:

    1. Masuyama, Ryo, 2023. "Endogenous privacy and heterogeneous price sensitivity," MPRA Paper 117316, University Library of Munich, Germany.
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    3. Foros, Øystein & Kind, Hans Jarle & Nguyen-Ones, Mai, 2024. "The choice of pricing format: Firms may choose uniform pricing over personalized pricing to induce rivals to soften competition," Information Economics and Policy, Elsevier, vol. 66(C).
    4. Noriaki Matsushima & Mark J. Tremblay, 2024. "Network compatibility and incumbent pricing regimes," ISER Discussion Paper 1265, Institute of Social and Economic Research, Osaka University.
    5. 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.
    6. Houba, Harold & Motchenkova, Evgenia & Wang, Hui, 2023. "Endogenous personalized pricing in the Hotelling model," Economics Letters, Elsevier, vol. 225(C).
    7. Esteves, Rosa-Branca & Carballo-Cruz, Francisco, 2023. "Can data openness unlock competition when an incumbent has exclusive data access for personalized pricing?," Information Economics and Policy, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Competitive price discrimination; Store preferences; Product preferences; High and low demand consumers; Perfect and imperfect personalized pricing; Group pricing; Digital economy;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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