Price discrimination based on purchase behavior and service cost in competitive channels

Abstract

With the recent emergence of cloud computing and big data technologies, collection of consumers’ information is widespread. Retailers use consumers’ purchase history and consumptive habits data to price discriminate between current and new, high-cost and low-cost consumers. We investigate behavior-based pricing (BBP) and consumers cost-based pricing (CCP) simultaneously in a competitive two-period market in which bricks and clicks retailers sell products to high-cost-type and low-cost-type consumers during two periods. We examine how the price discrimination affects the channel members’ prices, market shares and profits. We find that dual price discriminations (BBP and CCP) decrease the service cost advantage retailer’s profit, but increase the service cost disadvantage retailer’s profit if the consumer’s travel cost is low. Compared the market shares of retailers, it is interesting that a cost advantage retailer serves more type-H consumers under the case of BBP and CCP than other cases. In addition, our results illustrate that cost disadvantage retailers prefer to reward the current consumers in the second period. Additionally, we find that consumers may benefit from price discrimination that they face a lower price in the case of BBP and CCP than other cases under certain conditions. Even more egregious, the current type-H consumers served by the cost advantage retailer enjoy a lower price than the type-L consumers served by the competitor.