Behavior-Based Discrimination: Is It a Winning Play, and If So, When?
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.
Volume (Year): 27 (2008)
Issue (Month): 6 (11-12)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Niladri B. Syam & Ranran Ruan & James D. Hess, 2005. "Customized Products: A Competitive Analysis," Marketing Science, INFORMS, vol. 24(4), pages 569-584, February.
- Yuxin Chen & Ganesh Iyer, 2002. "Research Note Consumer Addressability and Customized Pricing," Marketing Science, INFORMS, vol. 21(2), pages 197-208, November.
- Taylor, Curtis R., 2000.
"Supplier Surfing: Competition and Consumer Behavior in Subscription Markets,"
00-12, Duke University, Department of Economics.
- Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-246, Summer.
- Neeraj Arora & Ty Henderson, 2007. "Embedded Premium Promotion: Why It Works and How to Make It More Effective," Marketing Science, INFORMS, vol. 26(4), pages 514-531, 07-08.
- Yuxin Chen & Jinhong Xie, 2007. "Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage," Marketing Science, INFORMS, vol. 26(1), pages 52-66, 01-02.
- Alessandro Acquisti & Hal R. Varian, 2002.
"Contidioning Prices on Purchase History,"
- THISSE, Jacques-François & VIVES, Xavier, "undated".
"On the strategic choice of spatial price policy,"
CORE Discussion Papers RP
793, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
- Taylor Randall & Christian Terwiesch & Karl T. Ulrich, 2007. "Research Note—User Design of Customized Products," Marketing Science, INFORMS, vol. 26(2), pages 268-280, 03-04.
- J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
- Drew Fudenberg & Jean Tirole, 2000.
"Customer Poaching and Brand Switching,"
RAND Journal of Economics,
The RAND Corporation, vol. 31(4), pages 634-657, Winter.
- Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
- J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:27:y:2008:i:6:p:977-994. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.