Dynamic Personalized Pricing with Active Consumers

We study a two-period duopoly model where firms gather consumer data from first period customers then use them for second-period personalized pricing, with a focus on active consumers who can bypass price discrimination with identity management (IM). As a result, IM weakens competition and allows firms to adopt perfect price discrimination which gives massive profit for firms in the personalized-pricing stage. Anticipating this, firms engage in below-cost pricing in the first stage to compete for consumer data. This strategy is similar to predatory pricing not only because of below-cost pricing but firms can also recoup losses later, however, we show that in this case below-cost pricing is driven by competition and beneficial to consumers.