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Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition

Author

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  • Chongwoo Choe
  • Stephen King
  • Noriaki Matsushima

Abstract

We study a two-period model of spatial competition with two symmetric firms where firms learn customers’ preferences from the first-period purchase, which they use for personalized pricing in the second period. With product choice exogenously fixed with maximal differentiation, we show that there exist two asymmetric equilibria and customer switching is only from one firm to the other unless firms discount future too much. Firms are worse off with such personalized pricing than when they use pricing at higher levels of aggregation. When product choice is also made optimally, there continue to exist two asymmetric equilibria given sufficiently small discounting, none of which features maximal differentiation. More customer information hurts firms, and more so when they make both product choice and pricing decisions.

Suggested Citation

  • 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.
  • Handle: RePEc:mos:moswps:2017-07
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    File URL: http://business.monash.edu/economics/research/publications/eco/0717pricingchoekinmatsushima.pdf
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    References listed on IDEAS

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    Cited by:

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

    More about this item

    Keywords

    Spatial competition; behavior-based price discrimination; personalized pricing; endogenous product choice;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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