Pricing with customer recognition

Abstract

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.

Investment in customer recognition and information exchange

“…From this perspective, information exchange generally intensifies competition, in line with the intuition developed in the influential model of Thisse and Vives (1988). Thisse and Vives (1988) compares competition based on completely individualized prices with competition based on uniform prices within the framework of a 1 Taylor (2003), Esteves (2010), Gabrielsen (2004), Chen andZhang (2009), Gehrig andStenbacka (2004), and Gehrig, Shy, and Stenbacka (2011) are examples of subsequent studies that have applied related approaches for analyzing history-based pricing. Fudenberg and Villas-Boas (2007) and Esteves (2009) present extensive literature surveys on behavior-based price discrimination.…”

History-based versus uniform pricing in growing and declining markets

“…Chen (1997) focuses on a symmetric duopoly model with a two-period horizon and heterogeneous switching costs and finds that competition with history-based pricing leads to more competitive outcomes than competition with uniform pricing, implying that consumers benefit from history-based pricing whereas firms lose. Similar qualitative conclusions are reached within the framework of a somewhat different two-period model by Esteves (2010). Focusing on an asymmetric duopoly model with inherited market dominance Gehrig, Shy, and Stenbacka (2012) establish that consumers in such a configuration tend to benefit from history-based pricing.…”

“…According to these comparisons, history-based pricing tends to intensify competition compared with uniform pricing, meaning that history-based pricing leads to lower prices and industry profits than uniform pricing, when evaluated over a two-period horizon (see, for example Chen (1997) or Esteves (2010)). In contrast, we show that in an infinite horizon overlapping generations (OLG) framework, history-based pricing can lead to higher average prices and industry profits than uniform pricing, particularly in sufficiently declining markets with a high consumer exit rate.…”

Media as multi-sided platforms

“…While that was extremely difficult in the case of traditional media (tailored to mass audiences), it has become easier in the context of some new media interactive platforms (such as social networks, online press, Hulu). As consumers interact through these platforms, they reveal information about their tastes and preferences, amplifying the range of possibilities to effectively implement price discrimination strategies (Esteves, 2010).…”