Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can

Abstract

This paper aims to understand under what market conditions, can competing symmetric firms employ personalized pricing as a winning strategy. A key departure of our paper from the literature is that we introduce customer heterogeneity in demand. If firms´ data discloses only vertical information (demand heterogeneity), firms can only employ group pricing. This is always a winning strategy. When data discloses horizontal information (consumer preferences) and vertical information, perfect personalized pricing (PPP) becomes feasible. If data only discloses horizontal information, fi rms can only employ imperfect personalized pricing (IPP). By comparing uniform pricing (UP) with personalized pricing, we show that if the share of high demand customers in the market is greater than the share of low demand consumers, firms are always better off with no discrimination. More importantly, we show that if heterogeneity in purchase quantity is sufficiently high, then personalized pricing can be a winning strategy for all symmetric practice firms. If heterogeneity in consumer value is high and the share of high demand consumers is sufficiently low, in comparison to UP, both firms are better off under IPP. For an intermediate share of high demand consumers, firms can get higher profits under PPP than under UP and IPP.