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Personalized Pricing, Competition and Welfare

Author

Listed:
  • Harold Houba

    (Vrije Universiteit Amsterdam)

  • Evgenia Motchenkova

    (Vrije Universiteit Amsterdam)

  • Hui Wang

    (Beijing Zhengjiang Science and Technology Co.)

Abstract

Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically differentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.

Suggested Citation

  • Harold Houba & Evgenia Motchenkova & Hui Wang, 2022. "Personalized Pricing, Competition and Welfare," Tinbergen Institute Discussion Papers 22-020/VII, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20220020
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    File URL: https://papers.tinbergen.nl/22020.pdf
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • 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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