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Personalized Pricing and Quality Customization

Author

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  • Anindya Ghose
  • Ke-Wei Huang

Abstract

"We embed the principal-agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness to pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for nonloyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is nonmonotonic in valuations such that some low-valuation consumers get higher surplus than high-valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher-quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus." Copyright Published 2009. This article is a US Government Work and is in the public domain in the USA..

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jemstr:v:18:y:2009:i:4:p:1095-1135
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    Cited by:

    1. Doh-Shin Jeon & Domenico Menicucci, 2017. "The Benefits of Diverse Preferences in Library Consortia," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 105-135, March.
    2. repec:eee:ijrema:v:31:y:2014:i:2:p:168-177 is not listed on IDEAS
    3. Jeon, Doh-Shin & Menicucci, Domenico, 2013. "When Is Building a Library Consortium Bene ficial?," IDEI Working Papers 791, Institut d'Économie Industrielle (IDEI), Toulouse, revised 07 Apr 2014.
    4. 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.
    5. Jeon, Doh-Shin & Menicucci, Domenico, 2014. "Buyer Group and Buyer Power When Sellers Compete," TSE Working Papers 14-543, Toulouse School of Economics (TSE), revised Nov 2017.
    6. Doh-Shin Jeon & Domenico Menicucci, 2009. "Bundling and competition for slots: On the portfolio effects of bundling," Economics Working Papers 1152, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2009.
    7. repec:eee:touman:v:49:y:2015:i:c:p:75-86 is not listed on IDEAS

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