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Price discrimination with consumer misperception

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  • Oren Bar-Gill

Abstract

The rise of big data and sophisticated, machine learning algorithms is increasing the prevalence of price discrimination and even personalized pricing. In traditional models, where consumers’ willingness-to-pay (WTP) is a function of preferences (and budget constraints), price discrimination is often celebrated for increasing efficiency albeit while reducing consumer surplus. This favourable view of price discrimination should be re-evaluated when WTP is a function of both preferences and misperceptions. With demand-inflating misperceptions, price discrimination is even more harmful to consumers and might reduce efficiency. These results are derived using a simple, linear demand model with different levels of price discrimination (or segmentation). In the many consumer markets where misperception is common, more careful scrutiny of price discrimination is warranted.

Suggested Citation

  • Oren Bar-Gill, 2021. "Price discrimination with consumer misperception," Applied Economics Letters, Taylor & Francis Journals, vol. 28(10), pages 829-834, June.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:10:p:829-834
    DOI: 10.1080/13504851.2020.1782333
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