To Each Their Own: Personalized Product Offerings in Competition

We study competition between two firms that personalize product offerings to consumers. Firms have private, imperfect signals of each consumer’s ideal location and offer each consumer a different product without observing the competitor’s product offering. We characterize the equilibrium personalization strategy and examine how the accuracies of firms’ signals affect equilibrium strategy, profits, and consumer welfare. A firm generally charges a higher price for a more niche product and profits more from niche consumers unless its prediction accuracy is sufficiently lower than its competitor’s. When both firms have the same industry-level prediction accuracy, an increase in accuracy initially relaxes but later intensifies price competition for niche consumers, having the opposite effect on mainstream consumers. Interestingly, equilibrium profits also have an inverse-U shape in the prediction accuracy. A higher accuracy can also decrease welfare for mainstream consumers. When firms can endogenously invest in prediction accuracy, firms have incentives to overinvest in equilibrium, resulting in a prisoner’s dilemma. Privacy regulations that reduce predictive accuracy, including industry self-regulation, could improve profits and hurt consumer welfare by relaxing price competition. Our results remain robust under consumer search. The paper also discusses what happens if firms charge uniform pricing, if consumers’ ideal locations are distributed on the Salop circle, or if firms receive common signals, highlighting price discrimination between mainstream and niche consumers as the key driver of results.