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Author: Anindya Ghose
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ISBN:
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Languages : en
Pages : 0
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Book Description
We develop an analytical framework to investigate the competitive implications of personalized pricing technologies (PP). These technologies enable first-degree price discrimination: firms charge different prices to different consumers, based on their willingness to pay. We first show that, even though a monopolist makes a higher profit with PP, its optimal quality is the same with or without PP. Next, we show that in a duopoly setting, personalized pricing adds value only if it is associated with product differentiation. We then consider a model of vertical product differentiation, and show how personalized pricing on the Internet affects firms' choices of quality differentiation in a competitive scenario. There are two equilibria. We find that, when the PP firm has a high quality both firms raise their qualities, relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. Our model also points out firms' optimal pricing strategies with PP, which may be non-monotonic in consumer valuations. Depending on the convexity of the marginal cost function, we outline the incentives of firms to deploy such technologies. Our model shows it is an optimal strategy for the low quality firm to adopt PP, if the other firm does not. Regardless of whether the low quality firm has PP, the high quality firm should adopt PP only if the cost function is not too convex. Next, if both firms acquire PP, then both firms earn lower profits than in the case where neither firm has PP. Essentially, they are trapped in a prisoner's dilemma. Finally, we show that, consumer surplus is highest when both firms adopt PP. Thus, despite the threat of first degree price discrimination, personalized pricing with competing firms can lead to an overall increase in consumer welfare.
Author: Anindya Ghose
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We develop an analytical framework to investigate the competitive implications of personalized pricing technologies (PP). These technologies enable first-degree price discrimination: firms charge different prices to different consumers, based on their willingness to pay. We first show that, even though a monopolist makes a higher profit with PP, its optimal quality is the same with or without PP. Next, we show that in a duopoly setting, personalized pricing adds value only if it is associated with product differentiation. We then consider a model of vertical product differentiation, and show how personalized pricing on the Internet affects firms' choices of quality differentiation in a competitive scenario. There are two equilibria. We find that, when the PP firm has a high quality both firms raise their qualities, relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. Our model also points out firms' optimal pricing strategies with PP, which may be non-monotonic in consumer valuations. Depending on the convexity of the marginal cost function, we outline the incentives of firms to deploy such technologies. Our model shows it is an optimal strategy for the low quality firm to adopt PP, if the other firm does not. Regardless of whether the low quality firm has PP, the high quality firm should adopt PP only if the cost function is not too convex. Next, if both firms acquire PP, then both firms earn lower profits than in the case where neither firm has PP. Essentially, they are trapped in a prisoner's dilemma. Finally, we show that, consumer surplus is highest when both firms adopt PP. Thus, despite the threat of first degree price discrimination, personalized pricing with competing firms can lead to an overall increase in consumer welfare.
Author: Anindya Ghose
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
We embed the principal-agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness-to-pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for non-loyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is non-monotonic in valuations such that some low valuation consumers get higher surplus than high valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus.
Author: Simon P. Anderson
Publisher:
ISBN:
Category : Advertising
Languages : en
Pages : 52
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Book Description
We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning "Bertrand-like" profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the "wrong" firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes.
Author: Bruno Jullien
Publisher:
ISBN:
Category : Competition
Languages : en
Pages : 64
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Book Description
The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between alternative distribution channels, which in turn has implications for firms' distribution strategies. We develop a formal model to examine a brand manufacturer's choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intra-brand competition between vertically related firms are thus in stark contrast to those obtained for inter-brand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniform price. By contrast, under personalized pricing mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices.
Author: Paolo G. Garella
Publisher:
ISBN:
Category :
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: Adam N. Elmachtoub
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
Increased availability of high-quality customer information has fueled interest in personalized pricing strategies, i.e., strategies that predict an individual customer's valuation for a product and then offer a price tailored to that customer. While the appeal of personalized pricing is clear, it may also incur large costs in the form of market research, investment in information technology and analytics expertise, and branding risks. In light of these trade-offs, our work studies the value of personalized pricing strategies over a simple single price strategy.We first provide closed-form lower and upper bounds on the ratio between the profits of an idealized personalized pricing strategy (first-degree price discrimination) and a single price strategy. Our bounds depend on simple statistics of the valuation distribution and shed light on the types of markets for which personalized pricing has little or significant potential value. Second, we consider a feature-based pricing model where customer valuations can be estimated from observed features. We show how to transform our aforementioned bounds into lower and upper bounds on the value of feature-based pricing over single pricing depending on the degree to which the features are informative for the valuation. Finally, we demonstrate how to obtain sharper bounds by incorporating additional information about the valuation distribution (moments or shape constraints) by solving tractable linear optimization problems.
Author: Chongwoo Choe
Publisher:
ISBN:
Category :
Languages : en
Pages :
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We study a model of behavior-based price discrimination where firms can agree to share customer information that can be used for personalized pricing. We show that firms are better off sharing customer information as it softens up-front competition when they gather information, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers.
Author: Jean-Pierre Dubé
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ISBN:
Category :
Languages : en
Pages : 0
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We study the welfare implications of personalized pricing, an extreme form of third-degree price discrimination implemented with machine learning for a large, digital firm. Using data from a unique randomized controlled pricing field experiment we train a demand model and conduct inference about the effects of personalized pricing on firm and consumer surplus. In a second experiment, we validate our predictions in the field. The initial experiment reveals unexercised market power that allows the firm to raise its price optimally, generating a 55% increase in profits. Personalized pricing improves the firm's expected posterior profits by an additional 19%, relative to the optimized uniform price, and by 86%, relative to the firm's unoptimized status quo price. Turning to welfare effects on the demand side, total consumer surplus declines 23% under personalized pricing relative to uniform pricing, and 47% relative to the firm's unoptimized status quo price. However, over 60% of consumers benefit from lower prices under personalization and total welfare can increase under standard inequity-averse welfare functions. Simulations with our demand estimates reveal a non-monotonic relationship between the granularity of the segmentation data and the total consumer surplus under personalization. These findings indicate a need for caution in the current public policy debate regarding data privacy and personalized pricing insofar as some data restrictions may not per se improve consumer welfare.
Author: Stefano Colombo
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Category :
Languages : en
Pages : 0
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We consider a duopoly model where firms can identify only a share of consumers, which is positively correlated with the consumer' preferences. Firms charge personalized prices to the consumers they can recognize and a uniform price to the rest of consumers. The firms' available information is given by the combination of two factors: the intensive margin, which determines the share of consumers the firms can recognize in each single location, and the extensive margin, which determines how many locations the firms can identify. Different market configurations emerge according to the size of these margins. We characterize the values of the intensive and extensive margins that maximize firms' profits, and we show that profits are non-monotonic. We also show that the composition, in addition to the size, of the available information - i.e., the mix of these margins - affects firms' profits significantly. Implications for regulatory policies concerning the protection of consumers' information are finally discussed.
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Languages : en
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