Pricing and Selection of Second-Degree Price Discrimination Menus

Although consumer profiling advocates tout benefits from personalization, consumer advocacy groups oppose profiling in online markets because of concerns about privacy and price discrimination. Policies such as opt-out or opt-in that provide consumers the option to voluntarily participate in profiling are the favored compromise. We compare voluntary profiling to no profiling and show that voluntary profiling leads to some counterintuitive results. Consumers that do not participate in profiling and some that participate are worse off under voluntary profiling. Neither social welfare nor aggregate consumer surplus is necessarily higher under voluntary profiling; even when voluntary profiling leads to an increase in social welfare, it may come at the expense of consumer surplus. If the seller cannot price discriminate and charge only a uniform price for everyone or the seller can only charge different prices based on the consumer’s participation status, then aggregate consumer surplus under voluntary profiling is higher and a reduction in privacy cost has a positive impact on all consumers as well as the seller. However, when personalized pricing is possible, reducing privacy cost alone may reduce aggregate consumer surplus. The primary reason for these results is that voluntary profiling allows the seller to identify high valuation consumers that have no incentive to participate and set a higher price for them (compared to no profiling) while simultaneously benefitting from the profile information of low valuation consumers that participate. However, a positive privacy cost mitigates the participation incentives of even low valuation consumers and hence sellers’ ability to engage in price discrimination.

The effect of secondhand markets on the firm's dynamic pricing and new product introduction strategies

In some industries with consumer variety-seeking and congestion effect, firms can often use discriminatory pricing scheme by consumer purchasing history. In this paper, we build up a two-stage game model to investigate this economic phenomenon. As for our research results, we can show that both market environmental factors, namely consumer variety-seeking and congestion effect, can lead to firms’ own market power, but the main reason for firm discriminatory pricing is consumer variety-seeking. After the purchase during the first phase, consumer variety-seeking leads to differences in consumers’ valuation of the products, and firms can effectively distinguish different consumer groups, leading to market segmentation and discriminatory pricing during the second phase. The firms offer discounting prices for loyal consumers, but charge new customers higher prices, trying to attract repeat purchases of old customers and avoid too much loss of old customers. Because the congestion effect on all consumers is consistent, it will not lead to the differences in consumers’ valuation of products, and it is impossible for firms to make discriminatory pricing. But the congestion effect can restrain the firms from reducing prices to attract consumers, and weaken the competition between the firms, resulting in the tacit collusion” between oligarchic firms. In fact, we also find that both market environmental factors weaken price competition. Compared with uniform pricing, discriminatory pricing results in lower equilibrium prices during two phases, and both the equilibrium profits and social welfare are also lower, but consumers gain higher surplus. Further pricing strategy choice shows that discriminatory pricing based on consumer purchasing history selected by both two firms is an equilibrium result, leading to lower profits of two firms, thus they fall into the prisoner’s dilemma”. This paper explores the general welfare standard and the competition policy about the discriminatory pricing based on consumer purchasing history. The discriminatory pricing based on consumer purchasing history belongs to the third-degree price discrimination. Discriminatory pricing does not increase the total quantities of goods, so total social welfare falls. In general, in an industry with consumer variety-seeking and congestion effect, there is very sufficient competition between firms, which have almost no market power, and firms’ pricing behavior is more benefcial to consumers. The loss of social welfare mainly comes from consumer variety-seeking; it is very difficult to understand the information of characteristics of consumers, and there is a great deal of information costs. For these reasons, we believe that the competition policy should allow firms to adopt such pricing strategies and should not make too much intervention. The antitrust authorities should be cautious, and only confirmed that firms with such a pricing strategy have a dominant market position, can it intervene in firm behavior.

In many industries, Internet referral services, hosted either by independent third-party infomediaries or by manufacturers, serve as digitally enabled lead-generators in electronic markets, directing consumer traffic to downstream retailers in a distribution network. This reshapes the extended enterprise from the traditional network of upstream manufacturers and downstream retailers, to include midstream third-party and manufacturer-owned referral servics in the supply chain. We model competition between retailers in a supply chain with such digitally- enabled institutions, and consider their impact on the optimal contracts between the manufacturer, referral intermediary and the retailers. Offline, retailers face a higher customer discovery cost. In return, they can engage in price discrimination based on consumer valuations. Online, they save on the discovery costs, but lose the ability to identify consumer valuations. This critical tradeoff drives firms' equilibrium strategies. We derive the optimal contracts for different entities in the supply chain and highlight how these contracts change with the entry of independent and manufacturer-owned referral services. The establishment of a referral service is a strategic decision by the manufacturer. It leads to a diversion of supply chain profit from a third-party infomediary to the manufacturer. Further, it enables the manufacturer to respond to an infomediary, by giving itself a greater flexibility in setting the unit wholesale fee to the profit maximizing level. Both third-party and manufacturer-sponsored referral services play a critical role in enabling retailers to discriminate across consumers different valuations. Retailers use online referral services to screen out low valuation consumers, and sell only to high valuation consumers in the online channel. Our model thus endogenously derives a correlation between consumer valuation and online purchase behavior. Finally, we show that under some circumstances, it is too costly for the manufacturer to eliminate the referral infomediary.

Warranties, extended warranties, and product quality

For many goods (such as experience goods or addictive goods), consumers' preferences may change over time. In this paper, we examine a monopolist's optimal pricing schedule when current consumption can affect a consumer's valuation in the future and valuations are unobservable. We assume that consumers are anonymous, i.e. the monopolist can't observe a consumer's past consumption history. For myopic consumers, the optimal consumption schedule is distorted upwards, involving substantial discounts for low valuation types. This pushes low types into higher valuations, from which rents can be extracted. For forward looking consumers, there may be a further upward distortion of consumption due to a reversal of the adverse selection effect; low valuation consumers now have a strong interest in consumption in order to increase their valuations. Firms will find it profitable to educate consumers and encourage forward looking behavior.

Price discrimination has become one of the airline industry’s most popular and common pricing strategies. The airline industry mainly uses three levels of price discrimination, charging different values for different customer groups. Due to this strategy, airlines can achieve maximum company profits. There are different types of airlines, and in this paper, we focus on the example of a low-cost airline - Southwest Airlines. Discussing the effectiveness of price discrimination as a pricing strategy in a low-cost airline is the primary purpose of this paper. In this paper, we present the essential background, advantages, and recent achievements of Southwest. How the company has successfully used price discrimination is analyzed and demonstrated with a specific example. Finally, it is concluded that for low-cost airlines, price discrimination is good but not necessarily the most effective and that other pricing strategies are to be considered among them.

The main objective of the study is to examine the effect of pricing strategies on customer patronage among customers of fast moving consumer goods in the midst of Covid-19 pandemic in Lagos and Ogun States, Nigeria. Survey research design was used for the study. Data was collected through the use of questionnaire. Convenience sampling technique was used for the study. Descriptive statistics was used to analyze the respondents’ biodata while multiple regression analysis was used to test the hypotheses formulated. Findings of the study revealed that pricing strategies (price penetration, price skimming, and price discrimination) had combined significant effect on customer patronage among customers of fast moving consumer goods in the midst of Covid-19 pandemic in Lagos State (Adj. R2 = 0.10, F = 6.172, p<0.05). In addition, price penetration, price skimming, and price discrimination had combined significant effect on customer patronage among customers of fast moving consumer goods in the midst of Covid-19 pandemic in Ogun State, Nigeria (Adj. R2 = 0.37, F = 24.900, p<0.05). The study concluded that customers will purchase more fasting moving consumer goods when manufacturers set low prices to attract more customers, charge higher prices in order to recover their cost of production, and charge different prices to different buyers in the midst of Covid-19 pandemic in Lagos and Ogun States. Keywords: Pricing Strategies, Price Penetration, Price Skimming, Price Discrimination, Customer Patronage

We study the cross-sectional dispersion of prices paid by EMU importers for French products. We document a significant level of price dispersion both within product categories across exporters, and within exporters across buyers. This latter source of price discrepancies, sellers' price discrimination across buyers, is indicative of deviations from the law-of-one price. Price discrimination (i) is substantial within the EU, within the euro area, and within EMU countries; (ii) has not decreased over the last two decades; (iii) is more prevalent among the largest firms and for more differentiated products; (iv) is lower among retailers and wholesalers; (v) is also observed within almost perfectly homogenous product categories, which suggests that a non-negligible share of price discrimination is triggered by heterogeneous markups rather than quality or composition effects. We then estimate a rich statistical decomposition of the variance of prices to shed light on exporters' pricing strategies.

We study the optimal design of a professional service in a mixed market of customers with heterogeneous skills and capabilities of using such service. Expert customers can avail of the service on their own, whereas amateur customers find it challenging to deploy the service and can only procure the service through an intermediary who resolves the technical issues. We develop a model that captures the essential trade‐offs in such settings: heterogeneity in customer expertise, decentralization between a service provider and intermediary, and congestion due to limited capacity. We analyze how customer expertise differences drive the equilibrium outcomes under various pricing and priority schemes. We find that a sufficient base of amateur customers allows expert customers to “free‐ride” under single pricing. Price discrimination can fully allay such free‐riding, but it may drive prices downward. Price discrimination also favors expert customers under the First‐Come‐First‐Served (FCFS) policy, but such preference is generally reversed under prioritization. Specifically, prioritizing amateur customers can bring revenue and welfare gains relative to the FCFS policy and a policy that prioritizes expert customers. Our results offer normative guidelines for managing professional services, clarifying regimes for price and priority discrimination, along with revenue and welfare implications.

This paper compares uniform vs. discriminative pricing strategies in a competitive setting featuring capacity restrictions, quality differentiation, and customer heterogeneity. It tackles this overarching question through operational lenses, by studying the joint impact of price discrimination and the allocation of limited inventory across customer segments. Thanks to advances in information technology, firms have developed new capabilities in terms of customer segmentation (by clustering customers into different segments) and price discrimination (by offering different prices to different customer segments). Price discrimination, although seemingly beneficial, can hurt firms in competitive environments. It is thus critical for firms to understand when to engage in price discrimination, and how to support discriminative pricing practices with appropriate inventory management strategies. We develop a Bertrand competition game featuring capacity restrictions, quality differentiation, and customer heterogeneity. We characterize (pure- or mixed-strategy) Nash equilibria for a single-stage game reflecting uniform pricing and for a two-stage inventory-price game reflecting discriminative pricing. We identify three sources of market friction in price competition, enabling firms to earn higher profits: capacity limitations, quality differentiation, and customer heterogeneity. Price discrimination eliminates the market frictions from customer heterogeneity, but strategic inventory allocation restores (or strengthens) the market frictions from capacity limitations. Ultimately, price discrimination is only beneficial when combined with optimal inventory allocation, thus underscoring the critical role of inventory allocation in the design of competitive pricing strategies.

In a vertical structure with a profit‐maximizing upstream firm, we show that whether the profits in the downstream market are higher under Bertrand competition or under Cournot competition depends on the technology differences among the downstream firms and on the pricing strategy (namely uniform pricing or price discrimination) of the upstream firm. The upstream firm's profit, the profit of the upstream and the downstream firms taken together, and social welfare are always higher under Bertrand competition than under Cournot competition.

Price discrimination within and across EMU markets: Evidence from French exporters

This chapter focuses on “economics‐based” pricing schemes for managing communication networks. It answers two questions such as how to design simple pricing schemes to achieve the best trade‐off between complexity and performance and how does the network information structure impact the design of pricing schemes. The chapter considers the revenue maximization problem of a monopolist service provider facing multiple groups of users. Each user determines its optimal resource demand to maximize the surplus, which is the difference between its utility and payment. The chapter shows that the complete price differentiation (CP) scheme is the optimal pricing scheme to maximize the revenue under complete information. In economics, price differentiation is often categorized by the first/second/third‐degree price differentiation taxonomy.

The paper studies second degree price discrimination for information goods. Prior research in the context of traditional goods (where marginal costs are convex as a function of product quality) shows that a firm can increase profits by offering vertically differentiated products to heterogeneous consumers. Some researchers have obtained the converse result for information products, assuming negligible marginal costs which vary little with product quality. Earlier models have used specific forms of the consumer utility function (most commonly a utility function that is linear in type and product quality). We model this problem using a generalized utility function where the utility is monotonically increasing with product quality and consumer type. We find that for information goods, price discrimination is profitable only in markets where high-value consumers benefit relatively more than low-value consumers from increases in quality.