Preference‐Based Discrimination and Profit: On the Profitability of Discriminatory Spatial Policy

Abstract

In many markets, firms are able to conduct discriminatory strategies based on whether a customer prefers a competitors' product or their own. This article considers the impact of such discrimination in duopoly models in which firms set prices and conduct precontract‐customization efforts for some customers. We identify two effects: (1) The ability to conduct preference‐based discrimination increases equilibrium profit as long as long as precontract customization is at least modestly important in competitive dynamics; and (2) The ability to conduct preference‐based discrimination enhances social welfare if any precontract customization is done.