Behavior-Based Pricing in Marketing Channels

With behavior-based pricing (BBP), firms use customers’ purchase history data to price discriminate between past and new customers. Prior research has examined BBP in a non-channel setting. In this paper, we investigate BBP in a channel setting in which manufacturers sell to customers through exclusive retailers. We examine how channel members’ adoption of BBP affects wholesale and retail prices, profits, consumer surplus, and social welfare. We find that BBP decreases channel members’ profits when retailers use BBP and manufacturers use uniform pricing. However, BBP increases channel members’ profits when manufacturers and retailers use BBP. In addition, BBP by retailers alone increases consumer surplus, whereas BBP by manufacturers and retailers decreases consumer surplus. When manufacturers also use BBP, BBP decreases social welfare to a greater degree than when only retailers use BBP. Furthermore, when manufacturers cannot use BBP, their profits are higher with long-term wholesale price contracts. When manufacturers can use BBP, short-term wholesale price contracts yield higher profits for manufacturers and retailers.