Competitive implications of personalized pricing with a dominant retailer

Abstract

The speedy development in information technology has enabled the dominant retailer to profile consumers and serve them with personalized pricing. Although adopting personalized pricing expands the dominant retailer’s market share, it may not increase the dominant retailer’s profit due to intense price competition with the fringe retailer. In this article, we develop a game-theoretical model to examine the competitive implications of personalized pricing in the presence of a dominant retailer, a fringe retailer and a common supplier. Our analysis shows that if the dominant retailer imposes personalized pricing on all consumers, all channel members’ profits decrease but consumer surplus increases, compared with the case where both retailers adopt uniform pricing. However, if the dominant retailer imposes personalized pricing on a part of consumers and endogenously determines the fraction of consumers who are given tailored prices, the dominant retailer’s profit and consumer surplus increase but the supplier and fringe retailer’s profits decrease, compared with the case where both retailers adopt uniform pricing. We also find that when the fringe retailer would like to purchase consumer information and both retailers impose personalized pricing on a part of consumers, the supplier and fringe retailer’s profits and consumer surplus increase but the dominant retailer’s profit decreases, compared with the case where only the dominant retailer adopts personalized pricing. In addition, we find that when consumers would like to pay the privacy-protecting cost to engage in identity management, all channel members’ profits may not decrease but consumer surplus is certain to decrease, compared with the case without consumer identity management.