Should a firm engage in behaviour-based price discrimination when facing a price discriminating rival? A game-theory analysis

Abstract

This article analyses the pricing policy equilibria emerging in a duopoly when one firm may choose whether to engage in behaviour-based price discrimination or uniform pricing while the rival price discriminates. The question we address is: should a firm price discriminate when facing a price discriminating rival? Our main conclusion is that, if the consumers are sufficiently myopic, it is better to choose uniform pricing instead of price discrimination. This is in contrast with the consensus reached in classic price discrimination theory, and it shows that it may be better for a firm to unilaterally renounce to price flexibility when facing a flexible firm.