JEL classification: D43 L13Keywords: Competitive behaviour-based price discrimination Discrete distribution of consumer preferences Economic effects This article studies the dynamic effects of behaviour-based price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. Consumers are myopic and firms are forward looking. In the static and first-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.

In this paper, I investigate the competitive and welfare effects of the improvements in information accuracy in markets where firms can price discriminate after observing a private and noisy signal about a consumer's brand preference. I show that when firms believe that consumers have a brand preference for them, then they charge more to these consumers, and this price has an inverse U-shaped relationship with the signal's accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signal's accuracy rises. While industry profit and overall welfare fall monotonically when price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus.

This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.

This paper examines how should …rms allocate their advertising budgets between consumers who have a high preference for their products (strong segment) and those who prefer competing products (weak segment). Targeted advertising transmits relevant information to otherwise uninformed consumers and it is used as a price discrimination device. With targeted advertising and price discrimination, we …nd that, when the attractiveness of the weak segment is low, each …rm advertises more intensively in its strong segment than in its weak segment. The same result arises when the attractiveness of the weak segment is high and advertising is expensive enough. Interestingly, when the attractiveness of the weak segment is high but advertising costs are su¢ ciently low, it is optimal for each …rm to advertise more intensively in its weak segment than in its strong segment. The paper also investigates how advertising strategies and equilibrium pro…ts are a¤ected by price discrimination.

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a …rst assessment of the role of demand elasticity on the pro…t, consumer and welfare e¤ects of BBPD. We show that the demand expansion e¤ect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that …rms are worse o¤ under BBPD, however, as demand elasticity increases the negative impact of BBPD on pro…ts gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this bene…t is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is su¢ ciently high.

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