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Should firms employ personalized pricing?

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  • Toshihiro Matsumura
  • Noriaki Matsushima

Abstract

The recent developments in information technology (IT) have enabled firms to employ personalized pricing. Should all firms employ personalized pricing even though the adaptation costs of such pricing strategies are not high? This paper theoretically demonstrates a situation in which all firms do not always employ personalized pricing even though the fixed costs to do so is zero. The model is based on those of Thisse and Vives (1988) and Shaffer and Zhang (2002). Our model incorporates the fact that firms engage in marginal cost-reducing activities after they decide whether to employ personalized pricing. As employing personalized pricing induces the rival firm to engage more in reducing its costs, to mitigate the cost-reducing activities of firms, the less-efficient firm should not employ personalized pricing. Our main result indicates that such firms should take into account their relative competitive positions and technological environments. When firms are small, they would need to reconsider whether to employ personalized pricing.

Suggested Citation

  • Toshihiro Matsumura & Noriaki Matsushima, 2013. "Should firms employ personalized pricing?," ISER Discussion Paper 0869, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0869
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    References listed on IDEAS

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    1. Qihong Liu & Konstantinos Serfes, 2004. "Quality of Information and Oligopolistic Price Discrimination," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 671-702, December.
    2. Matsumura Toshihiro & Matsushima Noriaki, 2010. "When Small Firms Fight Back Against Large Firms in R&D Activities," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-42, September.
    3. Junichiro Ishida & Toshihiro Matsumura & Noriaki Matsushima, 2011. "Market Competition, R&D And Firm Profits In Asymmetric Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 484-505, September.
    4. Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
    5. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers 2-1-1005, Berkeley Electronic Press.
    6. Neeraj Arora & Xavier Dreze & Anindya Ghose & James Hess & Raghuram Iyengar & Bing Jing & Yogesh Joshi & V. Kumar & Nicholas Lurie & Scott Neslin & S. Sajeesh & Meng Su & Niladri Syam & Jacquelyn Thom, 2008. "Putting one-to-one marketing to work: Personalization, customization, and choice," Marketing Letters, Springer, vol. 19(3), pages 305-321, December.
    7. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
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    Cited by:

    1. 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.
    2. Zhijun Chen & Chongwoo Choe & Noriaki Matsushima, 2018. "Competitive Personalized Pricing," ISER Discussion Paper 1023, Institute of Social and Economic Research, Osaka University.

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