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Behavior-based pricing under imperfectly informed consumers

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  • Esteves, Rosa-Branca
  • Cerqueira, Sofia

Abstract

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.

Suggested Citation

  • Esteves, Rosa-Branca & Cerqueira, Sofia, 2017. "Behavior-based pricing under imperfectly informed consumers," Information Economics and Policy, Elsevier, vol. 40(C), pages 60-70.
    • Handle: RePEc:eee:iepoli:v:40:y:2017:i:c:p:60-70
    DOI: 10.1016/j.infoecopol.2017.06.007
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    Cited by:

    1. Jean-Pierre I. Rest & Alan M. Sears & Li Miao & Lorna Wang, 2020. "A note on the future of personalized pricing: cause for concern," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(2), pages 113-118, April.
    2. Jeong, Yuncheol & Maruyama, Masayoshi, 2018. "Positioning and pricing strategies in a market with switching costs and staying costs," Information Economics and Policy, Elsevier, vol. 44(C), pages 47-57.
    3. Xuan Wang & Chi To Ng, 2020. "New retail versus traditional retail in e-commerce: channel establishment, price competition, and consumer recognition," Annals of Operations Research, Springer, vol. 291(1), pages 921-937, August.
    4. Charlson, G., 2021. "Third-Degree Price Discrimination in the Age of Big Data," Cambridge Working Papers in Economics 2159, Faculty of Economics, University of Cambridge.
    5. Hoe Sang Chung, 2020. "Quality choice and behavior-based price discrimination," Journal of Economics, Springer, vol. 131(3), pages 223-236, December.
    6. Charlson, G., 2021. "Third-Degree Price Discrimination in the Age of Big Data," Janeway Institute Working Papers 2104, Faculty of Economics, University of Cambridge.
    7. Umezawa, Masashi, 2022. "Behavior-based price discrimination in a horizontally and vertically differentiated duopoly with switching costs," Information Economics and Policy, Elsevier, vol. 61(C).
    8. Michel Tolksdorf, 2023. "On Point Predictions and Reference Dependence in Behavior-Based Pricing Experiments," Journal of Economics and Behavioral Studies, AMH International, vol. 15(1), pages 1-14.

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    More about this item

    Keywords

    Competitive price discrimination; Customer recognition; Informative advertising; Retargeting strategies; Welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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