IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v225y2023ics0165176523000629.html
   My bibliography  Save this article

Endogenous personalized pricing in the Hotelling model

Author

Listed:
  • Houba, Harold
  • Motchenkova, Evgenia
  • Wang, Hui

Abstract

We study endogenous personalized pricing in Hotelling’s model with vertically differentiated products, cost asymmetries and linear adjustment costs. We characterize the equilibrium and its welfare consequences. Adopting personalized pricing is the dominant strategy for both companies. The less efficient company never gains compared to competition in uniform pricing. We clarify the conditions under which the more efficient company can gain from competition in personalized pricing. Aggregate consumer surplus increases, but personalized pricing can harm consumers who purchase from the more-efficient (high-quality) firm.

Suggested Citation

  • Houba, Harold & Motchenkova, Evgenia & Wang, Hui, 2023. "Endogenous personalized pricing in the Hotelling model," Economics Letters, Elsevier, vol. 225(C).
    • Handle: RePEc:eee:ecolet:v:225:y:2023:i:c:s0165176523000629
    DOI: 10.1016/j.econlet.2023.111037
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176523000629
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2023.111037?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Greg Shaffer & Z. John Zhang, 2002. "Competitive One-to-One Promotions," Management Science, INFORMS, vol. 48(9), pages 1143-1160, September.
    2. Qihong Liu & Konstantinos Serfes, 2004. "Quality of Information and Oligopolistic Price Discrimination," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 671-702, December.
    3. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
    4. Toshihiro Matsumura & Noriaki Matsushima, 2015. "Should Firms Employ Personalized Pricing?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 887-903, October.
    5. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-137, March.
    6. Anindya Ghose & Ke‐Wei Huang, 2009. "Personalized Pricing and Quality Customization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1095-1135, December.
    7. Esteves, Rosa-Branca, 2022. "Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano Colombo & Clara Graziano & Aldo Pignataro, 2023. "Personalized Pricing with Imperfect Customer Recognition," CESifo Working Paper Series 10455, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Esteves, Rosa-Branca & Carballo-Cruz, Francisco, 2023. "Can data openness unlock competition when an incumbent has exclusive data access for personalized pricing?," Information Economics and Policy, Elsevier, vol. 64(C).
    2. Zhijun Chen & pch346 & Chongwoo Choe & Jiajia Cong & Noriaki Matsushima, 2020. "Data-Driven Mergers and Personalization," Monash Economics Working Papers 16-20, Monash University, Department of Economics.
    3. Akio Kawasaki, 2020. "Airport pricing strategy by hub airports: does the number of local airports matter?," Asia-Pacific Journal of Regional Science, Springer, vol. 4(3), pages 835-857, October.
    4. Zhijun Chen & Chongwoo Choe & Jiajia Cong & Noriaki Matsushima, 2022. "Data‐driven mergers and personalization," RAND Journal of Economics, RAND Corporation, vol. 53(1), pages 3-31, March.
    5. Qiuyu Lu & Noriaki Matsushima, 2023. "Personalized pricing when consumers can purchase multiple items," ISER Discussion Paper 1192, Institute of Social and Economic Research, Osaka University.
    6. Rhodes, Andrew & Zhou, Jidong, 2022. "Personalized Pricing and Competition," MPRA Paper 112988, University Library of Munich, Germany.
    7. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.
    8. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2017. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Monash Economics Working Papers 07-17, Monash University, Department of Economics.
    9. Rosa-Branca Esteves, 2021. "Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can," NIPE Working Papers 08/2021, NIPE - Universidade do Minho.
    10. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2018. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Management Science, INFORMS, vol. 64(12), pages 5669-5687, December.
    11. Esteves, Rosa-Branca, 2022. "Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    12. Luo, Meiling & Li, Gang & Chen, Xudong, 2021. "Competitive location-based mobile coupon targeting strategy," Journal of Retailing and Consumer Services, Elsevier, vol. 58(C).
    13. Toshihiro Matsumura & Noriaki Matsushima, 2015. "Should Firms Employ Personalized Pricing?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 887-903, October.
    14. Ke-Wei Huang, 2009. "Optimal criteria for selecting price discrimination metrics when buyers have log-normally distributed willingness-to-pay," Quantitative Marketing and Economics (QME), Springer, vol. 7(3), pages 321-341, September.
    15. Choe, Chongwoo & Matsushima, Noriaki & Tremblay, Mark J., 2022. "Behavior-based personalized pricing: When firms can share customer information," International Journal of Industrial Organization, Elsevier, vol. 82(C).
    16. Zhijun Chen & Chongwoo Choe & Noriaki Matsushima, 2020. "Competitive Personalized Pricing," Management Science, INFORMS, vol. 66(9), pages 4003-4023, September.
    17. Paul Belleflamme & Wing Man Wynne Lam & Wouter Vergote, 2019. "Competitive Imperfect Price Discrimination and Market Power," CESifo Working Paper Series 7964, CESifo.
    18. Baye, Irina & Reiz, Tim & Sapi, Geza, 2018. "Customer recognition and mobile geo-targeting," DICE Discussion Papers 285, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    19. Chongwoo Choe & Noriaki Matsushima & Mark J. Tremblay, 2020. "Behavior-Based Personalized Pricing: When Firms Can Share Customer Information," ISER Discussion Paper 1083, Institute of Social and Economic Research, Osaka University.
    20. Pan, Weihua & Cao, Hang & Liu, Ying, 2023. "“Green” innovation, privacy regulation and environmental policy," Renewable Energy, Elsevier, vol. 203(C), pages 245-254.

    More about this item

    Keywords

    Personalized prices; Hotelling model; Technology adoption; Oligopoly; Profit paradox;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L4 - Industrial Organization - - Antitrust Issues and Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:225:y:2023:i:c:s0165176523000629. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.