Group pricing and personalized pricing

Abstract

This chapter is organized as follows. In Section 8.1, we start by defining formally the three types of price discrimination, which we will refer to as personalized pricing, group pricing, and menu pricing. We cover the latter type in the next chapter. Here, we consider jointly the first two types because, as we will argue, personalized pricing is nothing but an extreme form of group pricing, where the market segmentation is so fine that each separate ‘group’ consists of a single consumer. Both practices rely on the existence of observable and verifiable indicators of the consumers’ willingness to pay. Coupled with the absence of resale among consumers (i.e., arbitrage), this allows the firms to make a specific and unique price offer to each separate group of consumers. The better the information about consumers, the finer the partition of the consumers into groups and the larger the possibilities for firms to extract consumer surplus. If the firm is a monopoly, as we assume in Section 8.2, this is clearly the only effect at play. We thus observe that the discriminating monopolist's profits increase with the quality of the information it has about the willingness to pay of its consumers. In an oligopoly setting, however, the previous conclusion may not hold because a second effect comes into play. As we show in Section 8.3, price discrimination gives firms more flexibility to respond to their rivals’ actions, which tends to exacerbate price competition and, thereby, to lower profits. Choosing to discriminate becomes thus a strategic decision. As we show below, the balance between the two contrasting forces (surplus extraction and fiercer competition) depends on the quality of the information about consumers and on the relative importance of the different groups of consumers. Price discrimination In this section, we first propose a general typology of price discrimination practices. We then describe how firms manage to segment the market into well-recognized groups of consumers and sometimes, to acquire information about individual reservation prices.