How do customer characteristics impact behavior-based price discrimination? An experimental investigation

Abstract

We approach behavior-based price discrimination experimentally to identify customer characteristics that influence price discrimination in competitive markets. We provide insights on the impact of customer value heterogeneity and preference stochasticity on price discrimination in two period duopoly models with customer recognition. We find that sellers offer discounts to new customers when customers are homogenous and preferences are stable. While customer heterogeneity intensifies competition resulting in greater price discrimination and aggressive pricing, preference stochasticity reduces the incidence of price discrimination. Overall customer value heterogeneity and preference stochasticity do not provide the requisite conditions to ensure profitable loyalty rewards. We also find evidence of repeat purchase behavior amongst buyers and an aversion for add-on charges.