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Behavior-Based Discrimination: Is It a Winning Play, and If So, When?

Author

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  • Amit Pazgal

    () (Jesse H. Jones Graduate School of Management, Rice University, Houston, Texas 77252)

  • David Soberman

    () (INSEAD, 77305 Fontainebleau, France)

Abstract

With advances in technology, the collection of information from consumers at the time of purchase is common in many categories. This information allows a firm to straightforwardly classify consumers as either “new” or “past” consumers. This opens the door for firms to implement marketing that (a) discriminates between new and past consumers and (b) entails making offers to them that are significantly different. Our objective is to examine the competitive effects of marketing that tailors offers to consumers based on their past buying behavior. In a two-period model with two competing firms, we assume that each firm is able to commit about whether or not to implement behavior-based discrimination (BBD), i.e., to add benefits to its offer for past consumers in the second period. When the firms are identical in their ability to add value to the second-period offer, BBD generally leads to lower profits for both firms. Past customers are so valuable in the second period that BBD leads to cutthroat competition in the first period. As a result, the payoffs associated with the implementation of BBD form a prisoner's dilemma. Interestingly, when a firm has a significant advantage over its competitor (one firm has the capability to add more benefits for its past customers than the other), it can increase its profit versus the base case even when there is significant competition in the second period. Moreover, the firm at a disadvantage sometimes finds that the best response to BBD by a strong competitor is to respond with a uniform price and avoid the practice completely.

Suggested Citation

  • Amit Pazgal & David Soberman, 2008. "Behavior-Based Discrimination: Is It a Winning Play, and If So, When?," Marketing Science, INFORMS, vol. 27(6), pages 977-994, 11-12.
  • Handle: RePEc:inm:ormksc:v:27:y:2008:i:6:p:977-994
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    File URL: http://dx.doi.org/10.1287/mksc.1070.0355
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    References listed on IDEAS

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    Cited by:

    1. Mengze Shi, 2013. "A theoretical analysis of endogenous and exogenous switching costs," Quantitative Marketing and Economics (QME), Springer, pages 205-230.
    2. Jiwoong Shin & K. Sudhir & Dae-Hee Yoon, 2012. "When to "Fire" Customers: Customer Cost-Based Pricing," Management Science, INFORMS, pages 932-947.
    3. Brokesova, Zuzana & Deck, Cary & Peliova, Jana, 2014. "Experimenting with purchase history based price discrimination," International Journal of Industrial Organization, Elsevier, pages 229-237.
    4. Zuzana Brokesova & Cary Deck & Jana Peliova, 2014. "Experimenting with Behavior Based Pricing," Working Papers 14-12, Chapman University, Economic Science Institute.
    5. Jan Bouckaert & Hans Degryse & Theon Dijk, 2013. "Bertrand Competition with an Asymmetric No-discrimination Constraint," Journal of Industrial Economics, Wiley Blackwell, vol. 61(1), pages 62-83, March.
    6. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    7. Raphael Thomadsen & Robert Zeithammer & Ganesh Iyer & Dina Mayzlin & Yesim Orhun & Amit Pazgal & Devavrat Purohit & Ram Rao & Michael Riordan & Jiwoong Shin & Monic Sun & Miguel Villas-Boas, 2012. "A reflection on analytical work in marketing: Three points of consensus," Marketing Letters, Springer, vol. 23(2), pages 381-389, June.
    8. Iris Vilnai-Yavetz & Shaked Gilboa, 2014. "The cost (and the value) of customer attire: linking high- and low-end dress styles to service quality and prices offered by service employees," Service Business, Springer;Pan-Pacific Business Association, pages 355-373.
    9. repec:kap:qmktec:v:15:y:2017:i:2:d:10.1007_s11129-017-9181-1 is not listed on IDEAS
    10. Juanjuan Zhang, 2011. "The Perils of Behavior-Based Personalization," Marketing Science, INFORMS, pages 170-186.
    11. Jiwoong Shin & K. Sudhir, 2010. "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?," Marketing Science, INFORMS, pages 671-689.

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