Loyalty intelligence and price discrimination in a duopoly

Abstract

Business intelligence tools have enabled novel and relatively low-cost capabilities to collect and analyze vast amount of customer information. Accumulation of customer specific information along with transactional data empowers firms to categorize customers into segments and offer customized prices. We study the impact of price discrimination and market segmentation on competition and consumer purchase behavior in a game-theoretic model with two asymmetric firms. At equilibrium, both firms price discriminate and segment the market. Contrary to previous price discrimination and market segmentation findings, the game is not necessarily a prisoner’s dilemma. The firm dominating the industry is likely to improve its profits at the expense of the rival firm, and consumer welfare will increase with segmentation. We define two fundamental parameters, market dominance and the technology cost to industry dominance ratio, to drive segmentation technology adoption decisions, as a basis for our analytical approach.