Hans Jarle Kind, NHH, Bergen
"Competition with Personalized Pricing and Strategic Product Customization"
Consumers leave increasingly more digital footprints, and this improves firms' ability to practice personalized pricing (first-degree price discrimination) instead of uniform pricing. Given the choice, it is a dominant strategy for firms to use personalized pricing. However, competition between firms that use personalized prices might become so intense that they would have been better off if they instead used uniform prices. We ask whether strategic commitments on non-price variables like product customization or product differentiation might reduce firms' incentives to personalize prices. To answer this question, we first note that it is optimal for a firm that personalizes prices to set the purchasing price equal to marginal costs from consumers who buy from a rival. This is true independently of whether the rival has made any non-price commitments. In contrast, if a firm uses uniform pricing, the rival has incentives to make non-price commitments that soften competition. We show that this implies that the firms might non-cooperatively commit to uniform pricing to avoid being trapped in a highly competitive equilibrium.
Authors: Øystein Foros, Hans Jarle Kind and Mai Nguyen-Ones