Behavior-based Price Research Articles

Persuasive Advertising and Behavior-Based Price Discrimination

Persuasive Advertising and Behavior-Based Price Discrimination

Which is better for competing firms with quality increasing: behavior-based price discrimination or uniform pricing?

With the prevalence of subscription service model (i.e. Software-as-a-service, SaaS), firms are able to continuously improve their service quality online. Besides, subscribers need to renew their services after each subscription period, which provides more convenience for firms to implement behavior-based price discrimination (BBPD), namely, charging different prices for the repeat customers and for the rival's customers. Firms can respond to the rival's BBPD by adopting BBPD or by adopting uniform pricing (UP) and with a higher service quality. In this paper, we study the choices of competing firms’ pricing strategies in a two-period duopoly market when both firms can improve their quality in the second period. We consider firms’ asymmetric capability to improve their service quality and find that this asymmetry plays a critical role in determining firms’ pricing strategies. With exogenous quality improvement levels, we find that when two firms’ quality improvement difference is small, multiple equilibria prevail, namely, both adopt BBPD or both adopt UP in equilibrium. When the quality improvement difference is moderate, the asymmetric case where the disadvantaged firm adopts BBPD while the advantaged one adopts UP prevails in equilibrium, which is a unique finding absent in the previous literature. When the quality improvement difference is large, both firms will adopt UP in equilibrium, but both firms can be better off by adopting BBPD when the quality improvement difference exceeds a threshold, which is a win-win situation but a prisoner's dilemma game different from the previous studies. By examining industry profit, consumer surplus and social welfare, we find that firms’ interests are usually not aligned with the social planner's interests, and the social planner's interests are not always aligned with consumers’ interests. With endogenous quality improvement choices, the firm with R&D cost advantage tends to make a greater quality improvement, and the asymmetric case where firms adopt different pricing strategies disappears due to the impact of endogeneity of quality improvement. More specifically, when the R&D efficiency difference is small or moderate, both firms will adopt either BBPD or UP in equilibrium; but when two firms’ R&D efficiency difference is large, both firms will tend to adopt only UP in equilibrium. Comparing with the case under exogenous quality improvement levels, the social planner's interests are better aligned with the overall industry's interests but are worse aligned with consumers’ interests.

Behavior-Based Price Discrimination with a General Demand

Behavior-Based Price Discrimination with a General Demand

Profitability of behavior-based price discrimination

Profitability of behavior-based price discrimination

Behavior-based price discrimination in a horizontally and vertically differentiated duopoly with switching costs

This paper analyzes behavior-based price discrimination (BBPD) in an asymmetric duopoly with switching costs and including both vertical and horizontal differentiation. We demonstrate that there are two configurations of market share in equilibrium. In the first configuration, where both firms poach their rival’s consumers, the equilibria arise when switching costs are low and the firms are relatively symmetric. In the second configuration, where only the firm with more supporting services poaches the rival’s consumers, the resulting equilibria reverse. We reveal the impact of switching costs on firm profits under BBPD as well as under uniform pricing and show that with either high switching costs or sufficiently large firm asymmetries, BBPD may benefit both firms. Moreover, we find that in the second market configuration, social welfare can be higher with BBPD than with uniform pricing under high switching costs and large firm asymmetries. We also reach the same conclusion regarding social welfare when consumers are myopic in the first market configuration.

Behavior-based personalized pricing: When firms can share customer information

We study a two-period model of behavior-based price discrimination where firms can agree to share customer information before the first-period competition begins, and the information can be used for personalized pricing in the second-period competition. We show that information sharing is individually rational for firms as it softens upfront competition when information is gathered, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers. These findings are robust to firm asymmetries and varying discount factors for consumers and firms.

Behavior-Based Price Discrimination and Consumer Protection in the Age of Algorithms

Behavior-Based Price Discrimination and Consumer Protection in the Age of Algorithms

A behavior-based pricing model in retail systems considering vertical and horizontal competition

Demand fluctuations, price of products and customer’s preferences play an important role in distribution and retail systems. In this paper, the issue of competitive pricing is investigated in a distribution system considering customers’ behavior. The distribution system includes two wholesalers and two retailers with asymmetric power in the market. A new bi-level model is proposed to demonstrate the Stackelberg competition among the main entities in distribution systems (wholesalers and retailers). Moreover, the horizontal competition is examined among the retailers and wholesalers, individually. The horizontal competition among retailers is investigated on retail price and retailers’ location using Behavior-Based Price Discrimination (BBPD). On the other hand, the competition among wholesalers is modeled on wholesale price and service level. The proposed model concentrates on profit maximization objective for the entities and utility maximization for the customers through behavior-based price discrimination. The model is carried on an industrial case problem for sensitivity analysis and comparison of different scenarios to derive managerial insights.

Behavior-Based Price Discrimination and Product Choice

We study a two-period model of behavior-based price discrimination, as in Fudenberg and Tirole (RAND J Econ 31(4):634–657, 2000), but we allow firms to make their product choices in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (Manag Sci 64(12):5669–5687, 2018), where equilibrium features less-than-maximal differentiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.

Quality choice and behavior-based price discrimination

This study examines the impacts of behavior-based price discrimination (BBPD) on profits, consumer surplus, and welfare when firms choose their product qualities. To this end, we consider a differentiated duopoly model in which firms first make quality decisions, and in the two subsequent periods, compete in prices according to the pricing scheme, namely, uniform pricing or BBPD. We show that when consumers are more than moderately forward-looking, firms choose lower quality levels under BBPD than under uniform pricing. The profit and consumer surplus effects of BBPD relative to uniform pricing depend on the level of consumers’ myopia and/or quality improvement costs. When consumers are sufficiently myopic or quality costs are high, BBPD reduces industry profits and raises consumer surplus. However, the reverse happens when consumers are sufficiently forward-looking and quality costs are low. Interestingly, BBPD is detrimental to both firms and consumers when consumers are sufficiently forward-looking and quality costs are moderate, or when consumers are moderately forward-looking and quality costs are low. Social welfare is always lower under BBPD than under uniform pricing.

Welfare Impacts of Behavior-Based Price Discrimination with Asymmetric Firms

Purpose - This paper studies the welfare impacts of behavior-based price discrimination(BBPD) when firms are asymmetric in quality improvement costs. Design/methodology/approach - To this end, we consider a differentiated duopoly model with an inherited market share, where firms first make quality decisions and then compete in prices according to the pricing scheme, namely, uniform pricing or BBPD. Findings - We show that BBPD increases social welfare relative to uniform pricing if the firms’ cost gap is large enough. This is because BBPD induces more consumers to buy a high-quality product than under uniform pricing, and because a low-cost firm’s profit loss from BBPD decreases as the cost difference increases. Research implications or Originality - Our analysis offers policy implications for markets where BBPD raises antitrust concerns, and quality competition prevails.

Behavior-Based Personalized Pricing: When Firms Can Share Customer Information

We study a model of behavior-based price discrimination where firms can agree to share customer information that can be used for personalized pricing. We show that firms are better off sharing customer information as it softens up-front competition when they gather information, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers.

Behavior-Based Price Discrimination and Product Choice

We study a two-period model of behavior-based price discrimination in Fudenberg and Tirole (2000) but allow firms to make product choice in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (2018) where equilibrium features less than maximal differentiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.

Behavior-based price discrimination in a dual-channel supply chain with retailer’s information disclosure

Abstract This research investigates a manufacturer’s behavior-based price discrimination (BPD) strategies in a dual-channel supply chain in the presence of the retailer’s information disclosure service. The manufacturer sells a two-period experience product through its own online store and the physical storefronts of retailers. We set up four scenarios of two-period games between the manufacturer’s online and offline stores. Customers who are heterogeneous in their channel preferences are located along a Hoteling line of unit length. We focus on the interaction between the manufacturer’s BPD strategies and the retailer’s information disclosure services. We find that storefronts can provide information disclosure service at the beginning of period 2 while the manufacturer can apply BPD, through which the online store differentiates prices between new and repeat buyers based on the sale history of period 1. The research explores the competition between online and offline retail stores and the interplay between information disclosure and BPD in a dual-channel supply chain. Also, the research has important practical implications. Manufacturers should encourage new purchases in online stores when exercising BPD, if retailers can disclose information offline, especially offering experienced services. Furthermore, manufacturers should induce retailers to reveal the product information by distorting the wholesale price downward.

Behavior-Based Quality Discrimination

New technology enables firms to recognize customers from their purchase histories and then provide different quality levels of product features or services for repeat and new customers. Extant research has examined behavior-based price discrimination (BBP), that is, how firms set different prices for repeat and new customers. This research extends the literature by investigating behavior-based quality discrimination to reveal the unique effects of quality discrimination beyond the effects of BBP. Using a two-period game-theoretic model, we find that firms reward repeat customers on the quality dimension by offering them higher-quality product features or service than what new customers receive. Such quality discrimination dissuades competitive poaching, softens second-period price competition, and increases second-period profits. Meanwhile, firms reward new customers on the price dimension by offering them a lower price than what repeat customers pay. Therefore, firms should reward different types of customers with the right attribute (i.e., product features or services versus price). In addition, quality discrimination increases customer retention in the second period. Anticipating this outcome, forward-looking firms reduce first-period prices to compete aggressively for initial customers. This effect intensifies first-period competition and reduces first-period profits. Overall, behavior-based quality discrimination decreases firms' total profits but increases consumer surplus and social welfare.

Positioning and pricing strategies in a market with switching costs and staying costs

We analyze positioning and pricing strategies in a two-period duopoly where consumers have heterogeneous switching costs and staying costs. In the second period, we show that firms offer discounts to new customers in a market where there are more inertial consumers with large switching costs, while firms offer discounts to past customers in a market where there are more variety-seeking consumers with large staying costs. If in the second period of our model there exist both inertial consumers and variety-seeking consumers, horizontal product differentiation is minimized and both firms locate at the center of the Hotelling line market. Furthermore, when consumers are relatively sophisticated (forward-looking), behavior-based price discrimination (BBPD) hurts firms’ profits as shown in the previous literature. However, when consumers are sufficiently naive (or myopic) and do not care much about the second period when making first-period decisions, we find that BBPD can be profitable.

Selling or leasing? Dynamic pricing of software with upgrades

In this paper, we analyze the profitability of a selling and a leasing model by considering both software upgrades and different price discrimination strategies in a two-period model framework. Three price discrimination strategies are considered: inter-temporal, behavior-based, and a hybrid price discrimination strategy. We find that consumers’ inter-temporal purchase behaviors and a vendor's choice of price discrimination strategies make it possible for a selling model to be more profitable than a leasing model. More specifically, if the monopolist cannot commit to never using information about consumers’ past purchase behavior for price discrimination, the selling model is more profitable than the leasing model. We also find that if a selling model is adopted, the monopolist should choose the behavior-based price discrimination strategy with a reward for returning consumers; but if a leasing model is adopted, the monopolist should choose the inter-temporal price discrimination strategy with a rising price. We also extend our model to a duopoly market. Different from a monopoly case, we find that the selling model dominates the leasing model under the hybrid strategy, while these two models are equally profitable under the inter-temporal strategy. These findings provide new insights into the comparison of the selling and leasing models.

Price and Output Effects of Oligopoly Price Discrimination Under Best-Response Asymmetry

When firms competitively price discriminate, best-response functions may exhibit either best-response symmetry (firms’ ranking of strong and weak markets coincide) or best-response asymmetry (one firm’s strong market is another firm’s weak market). It has been shown in Corts (1998) and many models of behavior-based price discrimination that prices of all firms may decrease in all markets with best-response asymmetry. While one may presume that total consumption will increase upon low prices by all firms in all markets, such output effect has not been explicitly shown. We provide conditions on demands that are necessary for an output to increase as a result of competitive price discrimination. In particular, we link the condition to cross-price elasticity between the firms and the industry-level elasticity to average market price.

Behavior-Based Pricing, Production Efficiency, and Quality Differentiation

In a two-period vertical duopoly, we examine how behavior-based price discrimination (BPD) affects the firms’ endogenous quality differentiation and profits. The firms’ relative production efficiency, defined as the ratio between their unit cost difference and quality difference, plays a crucial role. With exogenous product qualities, BPD always decreases the profits of the more efficient firm, but increases those of the sufficiently less efficient firm. Anticipating its period 2 disadvantage in price discrimination, the less efficient firm competes more vigorously and also gains more in period 1 than its competitor. For the sufficiently less efficient firm, its period 1 gain dominates its period 2 loss, and its total profits increase. With endogenous quality choices, BPD does not alter the low-end quality (at the lower bound of the quality space), but increases the high-end quality, enlarging quality differentiation. This is because under BPD, each firm’s profit gain decreases (or its profit loss increases) in its relative production efficiency. Interestingly, BPD may increase both firms’ profits under endogenous quality differentiation. Aside from causing mismatch between consumers and products, we further show that BPD lowers social welfare through inducing excessive quality differentiation. This paper was accepted by J. Miguel Villas-Boas, marketing.

Behavior-based pricing under imperfectly informed consumers

This paper is a first look at the dynamic effects of behavior-based price discrimination in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. We show that in comparison to no discrimination, firms reduce their advertising efforts, charge higher first period prices and lower second period prices. As a result of that in contrast to the profit and consumer welfare results obtained under full informed consumers, we show that behavior-based price discrimination boosts industry profits at the expense of consumer welfare.