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Elasticity of demand and behaviour-based price discrimination

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  • Esteves, Rosa-Branca
  • Reggiani, Carlo

Abstract

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a first assessment of the role of demand elasticity on the profit, consumer and welfare effects of BBPD. We show that the demand expansion effect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that firms are worse off under BBPD, however, as demand elasticity increases the negative impact of BBPD on profits gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this benefit is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is sufficiently high.

Suggested Citation

  • Esteves, Rosa-Branca & Reggiani, Carlo, 2014. "Elasticity of demand and behaviour-based price discrimination," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 46-56.
  • Handle: RePEc:eee:indorg:v:32:y:2014:i:c:p:46-56
    DOI: 10.1016/j.ijindorg.2013.10.010
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    References listed on IDEAS

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    1. Rosa-Branca Esteves & Helder Vasconcelos, 2015. "Price Discrimination under Customer Recognition and Mergers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 523-549, September.
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    Citations

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    Cited by:

    1. Esteves, Rosa-Branca, 2014. "Behavior-based price discrimination with retention offers," Information Economics and Policy, Elsevier, vol. 27(C), pages 39-51.
    2. Elias Carroni, 2018. "Behaviour-based price discrimination with cross-group externalities," Journal of Economics, Springer, vol. 125(2), pages 137-157, October.
    3. Rosa-Branca Esteves & Qihong Liu & Jie Shuai, 2016. "Behavior-Based Price Discrimination in a Multi-Dimensional Preferences Market," NIPE Working Papers 4/2016, NIPE - Universidade do Minho.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    5. Yiquan Gu & Alexander Rasch & Tobias Wenzel, 2016. "Price-sensitive demand and market entry," Papers in Regional Science, Wiley Blackwell, vol. 95(4), pages 865-875, November.
    6. Kanying Liu & Yong Lan & Wei Li & Erbao Cao, 2019. "Behavior-Based Pricing of Organic and Conventional Agricultural Products Based on Green Subsidies," Sustainability, MDPI, Open Access Journal, vol. 11(4), pages 1-16, February.
    7. Jeong, Yuncheol & Maruyama, Masayoshi, 2018. "Positioning and pricing strategies in a market with switching costs and staying costs," Information Economics and Policy, Elsevier, vol. 44(C), pages 47-57.
    8. Carroni, Elias, 2016. "Competitive customer poaching with asymmetric firms," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 173-206.
    9. Arieh Gavious & Ella Segev, 2017. "Price Discrimination Based on Buyers’ Purchase History," Dynamic Games and Applications, Springer, vol. 7(2), pages 229-265, June.
    10. repec:nip:nipewp:08/2014 is not listed on IDEAS
    11. Andreia Amorim & Rosa-Branca Esteves, 2016. "Retention Strategies in a Switching Cost Model," NIPE Working Papers 10/2016, NIPE - Universidade do Minho.
    12. Elias Carroni, 2015. "Competitive Behaviour-Based Price: Discrimination among Asymmetric Firms," Working Papers 1501, University of Namur, Department of Economics.
    13. Esteves, Rosa-Branca & Cerqueira, Sofia, 2017. "Behavior-based pricing under imperfectly informed consumers," Information Economics and Policy, Elsevier, vol. 40(C), pages 60-70.
    14. Tong Zhang & Yixue Huo & Xin Zhang & Jie Shuai, 2019. "Endogenous third-degree price discrimination in Hotelling model with elastic demand," Journal of Economics, Springer, vol. 127(2), pages 125-145, July.
    15. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.

    More about this item

    Keywords

    Price discrimination based on purchase history; Elasticity of demand; Welfare;

    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

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