Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can

Abstract

This paper assesses the profit effects of Personalized Pricing (PP) in markets where businesses face consumers, who are heterogeneous in terms of preferences for firms/stores (horizontal dimension) and purchase quantity (vertical dimension). If firms’ data discloses only vertical information, firms can only employ group pricing. This is always a winning strategy. When data discloses horizontal and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, firms can only employ imperfect personalized pricing (IPP). By comparing uniform pricing (UP) with personalized pricing, we show that if the share of high demand customers in the market is greater than the share of low demand consumers, firms are always better off with no discrimination. More importantly, we show that if heterogeneity in purchase quantity is sufficiently high, then PP can indeed be a winning strategy for all symmetric discriminating firms. If heterogeneity in consumer value is high and the share of high demand consumers is sufficiently low, in comparison to UP, both firms are better off under IPP. For an intermediate share of high demand consumers, firms can get higher profits under PPP than under UP and IPP.