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On the limitations of data-based price discrimination

Author

Listed:
  • Xie, Haitian

    (Guanghua School of Management, Peking University)

  • Zhu, Ying

    (Department of Economics, University of California San Diego)

  • Shishkin, Denis

    (Department of Economics, University of California San Diego)

Abstract

The classic third degree price discrimination (3PD) model requires the knowledge of the distribution of buyer valuations and the covariate to set the price conditioned on the covariate. In terms of generating revenue, the classic result shows that 3PD is at least as good as uniform pricing. What if the seller has to set a price based only on a sample of observations from the underlying distribution? Is it still obvious that the seller should engage in 3PD? This paper sheds light on these fundamental questions. In particular, the comparison of the revenue performance between 3PD and uniform pricing is ambiguous overall when prices are set based on samples. This finding is in the nature of statistical learning under uncertainty: a curse of dimensionality, but also other small sample complications.

Suggested Citation

  • Xie, Haitian & Zhu, Ying & Shishkin, Denis, 0. "On the limitations of data-based price discrimination," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:5916
    as

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    References listed on IDEAS

    as
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    3. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
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    More about this item

    Keywords

    Price discrimination; empirical revenue maximization; information theory; prior-independent pricing; optimal rate of convergence;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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