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Should firms employ personalized pricing?

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  • Toshihiro Matsumura
  • Noriaki Matsushima

Abstract

The recent developments in information technology (IT) have enabled firms to employ personalized pricing. Should all firms employ personalized pricing even though the adaptation costs of such pricing strategies are not high? This paper theoretically demonstrates a situation in which all firms do not always employ personalized pricing even though the fixed costs to do so is zero. The model is based on those of Thisse and Vives (1988) and Shaffer and Zhang (2002). Our model incorporates the fact that firms engage in marginal cost-reducing activities after they decide whether to employ personalized pricing. As employing personalized pricing induces the rival firm to engage more in reducing its costs, to mitigate the cost-reducing activities of firms, the less-efficient firm should not employ personalized pricing. Our main result indicates that such firms should take into account their relative competitive positions and technological environments. When firms are small, they would need to reconsider whether to employ personalized pricing.

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Bibliographic Info

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0869.

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Date of creation: Mar 2013
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Handle: RePEc:dpr:wpaper:0869

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  1. Neeraj Arora & Xavier Dreze & Anindya Ghose & James Hess & Raghuram Iyengar & Bing Jing & Yogesh Joshi & V. Kumar & Nicholas Lurie & Scott Neslin & S. Sajeesh & Meng Su & Niladri Syam & Jacquelyn Thom, 2008. "Putting one-to-one marketing to work: Personalization, customization, and choice," Marketing Letters, Springer, vol. 19(3), pages 305-321, December.
  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. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers 2-1-1005, Berkeley Electronic Press.
  4. Junichiro Ishida & Toshihiro Matsumura & Noriaki Matsushima, 2010. "Market Competition, R&D and Firm Profits in Asymmetric Oligopoly," ISER Discussion Paper 0777, Institute of Social and Economic Research, Osaka University.
  5. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  6. Matsumura Toshihiro & Matsushima Noriaki, 2010. "When Small Firms Fight Back Against Large Firms in R&D Activities," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-42, September.
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