Behavior-Based pricing under asymmetric channel competition with strategic consumers

Abstract

With behavior-based pricing (BBP), retailers use customers’ purchase records to price discriminate between new and past customers. In this paper, we investigate BBP in a setting where sales channels have different purchasing conveniences, indicating that channels are asymmetric. We examine how the adoption of BBP affects retailers’ profits, and how purchasing convenience, measured by the hassle cost in our model, affects retailers’ pricing decisions. To address these questions, we build up a three-period model in which two competing retailers with different hassle costs independently decide whether to adopt BBP, and sell repeatedly purchased products to strategic customers. By comparing retailers’ profits in different cases with different retailers adopting BBP, we find the conditions under which BBP can be profitable for retailers. In particular, the retailer with the higher hassle cost is more likely to benefit from the adoption of BBP. Therefore, contrary to intuition, retailers with high hassle costs do not always need to work on improving convenience when adopting BBP. Also, we find that retailers tend to make the same decision on whether or not to adopt BBP, and their decision depends on the hassle-cost gap between the two channels. Our findings provide guidance for retailers with different channel convenience on how to use BBP and respond to consumers’ strategic behavior in a competitive setting.