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Behavior‐based price discrimination with nonuniform distribution of consumer preferences

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  • Rosa‐Branca Esteves
  • Qihong Liu
  • Jie Shuai

Abstract

Existing theories of competition with behavior‐based price discrimination (BBPD, also known as price discrimination based on purchase history), typically assume that consumer valuations are distributed uniformly. This assumption implies that the availability of BBPD creates a prisoner's dilemma in which firms are worse off and consumers better off in equilibrium, relative to uniform pricing. In this paper, we consider a wider class of consumer distributions and show that profit and welfare results change qualitatively. When consumers are sufficiently massed at the center of the market (e.g., triangular distribution), BBPD boosts industry profits at the expense of consumers. Otherwise, the usual findings prevail. Our results highlight how assumptions on the density of consumer valuations play a decisive role on pricing and welfare outcomes.

Suggested Citation

  • Rosa‐Branca Esteves & Qihong Liu & Jie Shuai, 2022. "Behavior‐based price discrimination with nonuniform distribution of consumer preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 324-355, April.
    • Handle: RePEc:bla:jemstr:v:31:y:2022:i:2:p:324-355
    DOI: 10.1111/jems.12466
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    Cited by:

    1. Li, Jianpei & Zhang, Wanzhu, 2022. "Behavior-based price discrimination and signaling of product quality," MPRA Paper 111572, University Library of Munich, Germany.
    2. Okuyama, Suzuka, 2024. "Behavior-based price discrimination and elastic demand," MPRA Paper 120949, University Library of Munich, Germany.
    3. 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).
    4. Dubus, Antoine, 2024. "Behavior-based algorithmic pricing," Information Economics and Policy, Elsevier, vol. 66(C).
    5. Lu, Wenbo & Shuai, Jie, 2024. "Endogenous price discrimination with asymmetric firms," China Economic Review, Elsevier, vol. 84(C).
    6. Li, Jianpei & Zhang, Wanzhu, 2022. "Behavior-based pricing and signaling of product quality," MPRA Paper 120263, University Library of Munich, Germany, revised 03 Jan 2023.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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