Competitive Behaviour-Based Price: Discrimination among Asymmetric Firms

This article studies the effects of Behaviour-Based Price Discrimination (BBPD) in a horizontally and vertically differentiated duopoly. In a two-period model, firms are allowed to condition their pricing policies on the past purchase behaviour of consumers. The paper shows two different types of equilibria depending on the strength of vertical differentiation. If the difference in quality is small enough, both firms steal each other’s con- sumers and suffer a situation in which prices and profits are lower and the consumer surplus increases. When quality differentials are instead substantial, asymmetric behaviours arise: the high-quality firm sells its product to few consumers at a high price in the first period and then becomes aggressive in the second one. As a consequence, customers only move from the low-quality to the high-quality firm. If consumers are myopic, the ODS scenario is detrimental for them and beneficial for firms in relation to uniform pricing. If instead consumers are forward-looking, they and the low-quality firm are better off and the high-quality firm is worse off when BBPD is viable.