A competitive model of standardization and customization with behavior-based pricing

Abstract

With behavior-based pricing (BBP), firms use consumers’ purchase history data to price discriminate between new and past consumers. In this paper, we investigate BBP in a competitive setting, which consists of a standard product firm and a custom product firm. We examine how firms’ adoption of BBP affects product variety, lead time, and price decisions. We formulate this problem as a two-period game model. Through the analysis of equilibrium outcomes, we find that BBP by the standard product firm alone decreases product variety, whereas BBP by the custom product firm alone increases lead time. In addition, BBP increases one firm’s market share when only this firm uses BBP. Furthermore, the impact of BBP on profits is influenced by the consumer sensitivity to lead time and the cost incurred by reducing lead time.