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First Degree Price Discrimination Using Big Data

Author

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  • Benjamin Reed Shiller

    () (Economics Department, Brandeis University)

Abstract

Second and 3rd degree price discrimination (PD) receive far more attention than 1st degree PD, i.e. person-specific pricing, because the latter requires previously unobtainable information on individuals’ willingness to pay. I show modern web behavior data reasonably predict Netflix subscription, far outperforming data available in the past. I then present a model to estimate demand and simulate outcomes had 1st degree PD been implemented. The model is structural, derived from canonical theory models, but resembles an ordered Probit, allowing methods for handling massive datasets. Simulations show using demographics alone to tailor prices raises profits by 0.14%. Including web browsing data increases profits by much more, 1.4%, increasingly the appeal of tailored pricing, and resulting in some consumers paying twice as much as others do for the exact same product. There is an updated version of this paper. Personalized Discrimination Using Big Data, working paper #108.

Suggested Citation

  • Benjamin Reed Shiller, 2013. "First Degree Price Discrimination Using Big Data," Working Papers 58, Brandeis University, Department of Economics and International Businesss School, revised Jan 2014.
  • Handle: RePEc:brd:wpaper:58
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP58R2.pdf
    File Function: Revised version, 2014
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP58R.pdf
    File Function: Revised version, 2013
    Download Restriction: no

    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP58.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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    4. Alan L. Montgomery & Shibo Li & Kannan Srinivasan & John C. Liechty, 2004. "Modeling Online Browsing and Path Analysis Using Clickstream Data," Marketing Science, INFORMS, vol. 23(4), pages 579-595, November.
    5. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2011. "Bundle-Size Pricing as an Approximation to Mixed Bundling," American Economic Review, American Economic Association, vol. 101(1), pages 263-303, February.
    6. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics (QME), Springer, vol. 5(3), pages 239-292, September.
    7. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    8. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    9. Feldstein, Martin, 1995. "College Scholarship Rules and Private Saving," American Economic Review, American Economic Association, vol. 85(3), pages 552-566, June.
    10. Ben Shiller & Joel Waldfogel, 2011. "Music for a Song: An Empirical Look at Uniform Pricing and Its Alternatives," Journal of Industrial Economics, Wiley Blackwell, vol. 59(4), pages 630-660, December.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Paul Belleflamme & Wing Man Wynne Lam & Wouter Vergote, 2017. "Price Discrimination and Dispersion under Asymmetric Profiling of Consumers," Working Papers halshs-01502452, HAL.
    2. Jean-Pierre Dubé & Sanjog Misra, 2017. "Scalable Price Targeting," NBER Working Papers 23775, National Bureau of Economic Research, Inc.
    3. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2017. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Monash Economics Working Papers 07-17, Monash University, Department of Economics.
    4. Imke Reimers & Benjamin R. Shiller, 2018. "Proprietary Data, Competition, and Consumer Effort: An Application to Telematics in Auto Insurance," Working Papers 119, Brandeis University, Department of Economics and International Businesss School.
    5. Foschi, Matteo, 2017. "Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes," CRETA Online Discussion Paper Series 37, Centre for Research in Economic Theory and its Applications CRETA.
    6. Baye, Irina & Sapi, Geza, 2014. "Targeted pricing, consumer myopia and investment in customer-tracking technology," DICE Discussion Papers 131, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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