Personalized Pricing and Distribution Strategies

The availability of consumer data has led many firms to alter their pricing policy and move towards personalized pricing. This trend has implications for firms’ strategies over which channels to use for reaching consumers. In this article, we develop a formal model to examine whether a brand manufacturer prefers to sell only through its own direct channel (mono distribution) or through an independent retailer as well (dual distribution). Compared with uniform pricing, personalized pricing allows for higher rent extraction but also leads to fiercer intra-brand competition in the latter case. We show that, if the manufacturer’s and the retailer’s channel are vertically differentiated and the manufacturer offers higher quality, mono distribution can be optimal under personalized pricing even if the retailer broadens the demand of the manufacturer’s product. Instead, with uniform pricing, selling through both channels is always optimal. We also show that industry profits may be the largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices. Instead, if the two channels are horizontally differentiated, or vertically differentiated with the independent retailer offering higher quality, dual distribution is the optimal strategy under both personalized and uniform pricing. Our results are able to explain the distribution strategies of manufacturers in different industries. They also imply that the insights about the effects of personalized pricing obtained in classic frameworks analyzing inter-brand competition between independent firms do not carry over to the case of intra-brand competition.