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Author: Chongwoo Choe
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Languages : en
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We study a two-period model of behavior-based price discrimination in Fudenberg and Tirole (2000) but allow firms to make product choice in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (2018) where equilibrium features less than maximal differ- entiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.
Author: Chongwoo Choe
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ISBN:
Category :
Languages : en
Pages :
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Book Description
We study a two-period model of behavior-based price discrimination in Fudenberg and Tirole (2000) but allow firms to make product choice in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (2018) where equilibrium features less than maximal differ- entiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.
Author: Rosa Branca Esteves
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Languages : en
Pages : 0
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This paper offers a complete picture of the impact of behavior-based price discrimination on profits, consumer surplus, and welfare in markets with a general demand function, where consumers and firms can discount the future at different discount factors. Regardless of the demand function considered, in comparison to uniform pricing, BBPD reduces firmsí second-period prices and profits. In contrast, we show that new results arise regarding the impact of BBPD on first-period prices. Under perfectly inelastic and CES demand, the firm-side e§ect is null and the consumer-side e§ect fully explains the increase in first-period prices. This is no longer the case when the price elasticity of demand varies with price level. Specifically, we show that the firm-side effect can lead firms to raise first-period prices, even when consumers are myopic. We also show that, depending on the demand function considered, the consumer side effect can act to reduce or increase first-period prices. The overall impact of BBPD on first-period prices depends on the interplay between these two effects. Our analysis reveals that the output effect and consumer switching play an important role in explaining the impact of BBPD on welfare. When discount factors are equal, BBPD may have a positive or negative impact on consumer surplus and social welfare, which contrasts with the result that BBPD is beneficial for consumers under a unit and CES demand. For a linear demand function, we identify the regions for firms and consumers discount factors where BBPD can simultaneously enhance or reduce total discounted profits, consumer surplus, and social welfare.
Author: Natalia Fabra
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Category : Competition
Languages : en
Pages : 58
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In a seminal paper, Champsaur and Rochet (1989) showed that competing firms choose non-overlapping qualities so as to soften price competition at the cost of giving up profitable opportunities to price discriminate. In this paper we show that an arbitrarily small amount of search costs is enough to give rise to an equilibrium with overlapping qualities. In markets with search costs, competing firms face the monopolist's incentive to price discriminate, which induces them to offer the full quality range even if this forces them to compete head-to-head. Hence, even though search costs increase prices and reduce consumers surplus for given quality choices, search costs can also lead to lower prices and higher consumer surplus whenever they induce firms to offer broader and overlapping product lines. Our analysis also provides predictions regarding pricing by multi-product firms in markets with search costs under various retail market structures. Product choices and pricing by online bookstores motivate our findings.
Author: Paolo G. Garella
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ISBN:
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Languages : en
Pages : 25
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Book Description
We study price personalization in a two period duopoly with vertically differentiated products. In the second period a firm knows the purchase history of all customers, as in the standard Behavior Based Price Discrimination models. However in the second period it also has detailed personal information on its own customers, enabling it to quote personalized prices. The analysis reveals that there exists a natural market (nm) for each firm, defined as the set of customers that cannot be poached by the rival in period two. Since in equilibrium all contestable consumers belong to the largest nm, poaching will only be one way. The firm with the largest nm, has highest profits, but not necessarily the largest market share. All consumers gain from price personalization..Profits are lower than under uniform pricing. Quality choice is well defined for the low quality and a quality dfferential arises, though the exact choice for the high quality depends upon the cost specification.
Author: Hoe Sang Chung
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Category :
Languages : en
Pages : 0
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This paper examines the profitability of behavior-based price discrimination (BBPD) by duopolists producing horizontally differentiated experience goods. Considering a three-stage game in which the firms first make price discrimination decisions followed by two-stage pricing decisions, the two main results we obtain are the following: (i) if consumers underestimate the quality of the products at a level that is not very low, there are two subgame perfect Nash equilibria where both firms do not collect information about consumers' purchase histories so that neither firm price discriminates and where both firms collect consumer information to practice BBPD; (ii) BBPD is more profitable than uniform pricing if consumers overestimate at a more than moderate level.
Author: Stefano Colombo
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Category :
Languages : en
Pages : 0
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We develop a model of behavior- and characteristic-based discriminatory pricing where consumers are heterogeneous both in tastes and in price sensitivity. Each firm is able to distinguish between the consumers that have bought from it and those that have bought from the rival. Furthermore, each firm learns the price sensitivity of their own consumers. We show that using this additional information may yield higher profits than uniform pricing provided that consumers are heterogeneous enough with respect to price sensitivity. We also discuss consumer surplus implications of such behavior- and characteristic-based price discrimination, and we show that the impact of price discrimination depends on both the consumer type and the level of consumers' heterogeneity.
Author: Haggai Porat
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Category :
Languages : en
Pages : 0
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The legal literature on price discrimination focuses primarily on consumers' immutable features, like when higher interest rates are offered to black borrowers and higher prices to women at car dealerships. This paper examines a different type of discriminatory pricing practice: behavior-based pricing (BBP), where prices are set based on consumers' behavior, most prominently their prior purchasing decisions. The increased use of artificial intelligence and machine learning algorithms to set prices has facilitated the growing penetration of BBP in various markets. Unlike race-based and sex-based discrimination, with BBP, consumers can strategically adjust their behavior to impact the prices they will be offered in the future. Sellers, in turn, can adjust prices in early periods to influence consumers' purchasing decisions so as to increase the informational value of these decisions and thereby maximize profits. This paper analyzes possible legal responses to BBP and arrives at three surprising policy implications: One, when non-BBP discrimination is efficient but with potentially problematic distributional implications, BBP can either increase or decrease efficiency. Two, even if BBP is desirable, mandating its disclosure may reduce overall welfare even though this would reduce informational asymmetry in the market. Three, a right to be forgotten (a right to erasure) may be desirable even though it increases informational asymmetry.
Author: Louis Phlips
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ISBN:
Category :
Languages : en
Pages : 37
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Author: Stefano Colombo
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Category :
Languages : en
Pages : 0
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In this article, we develop a model encompassing behavior-based discriminatory pricing as a limit case of a more general framework where firms have incomplete information about consumers' purchase histories. We show that information accuracy has a nonmonotonic impact on profits and the worst situation for firms is when information accuracy is intermediate. We also discuss welfare and consumer surplus implications of information accuracy. Although welfare monotonically decreases with the level of information accuracy, there is an inverse U-shape relationship between consumers surplus and information accuracy.
Author: Sumit Shrivastav
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Category :
Languages : en
Pages :
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