Behavior-based price discrimination with non-uniform distribution of consumer preferences

Abstract

Firms commonly price discriminate across consumers based on purchase history, a practice known as behavior-based price discrimination (BBPD). Existing studies usually assume that consumer preferences follow uniform distribution, and find that BBPD benefits consumers at the cost of firms, prisoners’ dilemma. In this paper, we consider a class of consumer preferences distribution and show that new profit and welfare results arise. In particular, when consumer preferences are sufficiently clustered at the center of the market (e.g. triangular distribution), BBPD boosts industry profits at the expense of consumers. This is opposite to the standard prisoners’ dilemma results under uniform distribution. On the other hand, when consumer preferences are not clustered at the center of the market, the usual findings prevail. Our results highlight the important role of the shape of preferences and provide useful implications for relevant players including managers, regulators and consumer advocates.