Imperfect Behavior‐Based Price Discrimination

Abstract

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.

Should Mobile Marketers Collect Data Other Than Geo‐Location?*

“…The other strand of literature focuses on the profit effects of data quality, but considers the same level of consumer differentiation in their preferences. Most of these studies (e.g., Liu and Serfes, ; Esteves, ; Colombo, ) find that with customer data, irrespective of their quality, profits are unambiguously lower than without data . We argue that this result emerges because all these authors consider what we call “strongly differentiated” consumers, where additional customer data give rise to a relatively strong competition effect.…”

Behavior‐ and characteristic‐based price discrimination

“…In this case, better information means a finer partition of consumers. Colombo () considers a classic BBPD model where the information about consumers’ past purchase collected by the firms may be incomplete: hence, greater information means a wider scope of the information gathered. In contrast, in this article, better information means that the firms, after the consumers’ initial purchase, are able to identify their own consumers and to recognize their price sensitivity.…”

“…(), Esteves (), and Liu and Serfes () consider a static game. In contrast, we consider a two‐period model as in Colombo (), where the first‐period market sharing influences the competition in the second period…”

“…This result should be compared with existing findings in the literature investigating the impact of more information at the disposal of firms on the equilibrium profits. Whereas Esteves () finds that the profits monotonically decreases with information, Chen, Narasimhan, and Zhang (), Liu and Serfes (), and Colombo (,b) find that the profits may increase or decrease when information increases. Differently from the above papers, Proposition offers an explanation for the ambiguous impact of price discrimination on profits which is based on consumers’ heterogeneity.…”

Poaching in media: Harm to subscribers?

“…Recent articles have demonstrated how BBPD can actually be (partially) detrimental to consumers. In a context where firms have incomplete information about consumers' purchase histories, Colombo () shows an inverse U‐shaped relationship between consumer surplus and information accuracy. Moreover, BBPD boosts firms' profits at the detriment of consumers in the presence of a weak over‐time correlation between consumers' preferences (Chen & Pearcy, ) or when consumers are sufficiently myopic in anticipating the future (Carroni, ).…”