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Conditioning Prices on Purchase History

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  • Alessandro Acquisti

    ()
    (H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Hal R. Varian

    ()
    (School of Information Management and Systems, University of California, Berkeley, California 94720)

Abstract

The rapid advance in information technology now makes it feasible for sellers to condition their price offers on consumers’ prior purchase behavior. In this paper we examine when it is profitable to engage in this form of price discrimination when consumers can adopt strategies to protect their privacy. Our baseline model involves rational consumers with constant valuations for the goods being sold and a monopoly merchant who can commit to a pricing policy. Applying results from the prior literature, we show that although it is to price so as to distinguish high-value and low-value consumers, the merchant will never find it to do so. We then consider various generalizations of this model, such as allowing the seller to offer enhanced services to previous customers, making the merchant unable to commit to a pricing policy, and allowing competition in the marketplace. In these cases we show that sellers will, in general, find it profitable to condition prices on purchase history.

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File URL: http://dx.doi.org/10.1287/mksc.1040.0103
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 24 (2005)
Issue (Month): 3 (May)
Pages: 367-381

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Handle: RePEc:inm:ormksc:v:24:y:2005:i:3:p:367-381

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Keywords: Internet marketing; personalized marketing; price discrimination; targeting; privacy;

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  1. Allenby, Greg M. & Rossi, Peter E., 1998. "Marketing models of consumer heterogeneity," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 57-78, November.
  2. Peter E. Rossi & Robert E. McCulloch & Greg M. Allenby, 1996. "The Value of Purchase History Data in Target Marketing," Marketing Science, INFORMS, vol. 15(4), pages 321-340.
  3. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  4. John G. Riley & Richard Zeckhauser, 1980. "Optimal Selling Strategies:," UCLA Economics Working Papers 180, UCLA Department of Economics.
  5. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  7. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  8. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  9. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
  10. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  11. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  12. Salant, Stephen W, 1989. "When Is Inducing Self-selection Suboptimal for a Monopolist?," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 391-97, May.
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