Behavior-based pricing under imperfectly informed consumers

Abstract

This paper is a first look at the dynamic efects of BBPD in a horizontally diferentiation product market, where rms need to invest in advertising to generate awareness. When a rm is able to recognize customers with diferent purchasing histories, it may send them targeted advertisements with diferent prices. We show that in comparison to no discrimination, rms reduce their advertising eforts, charge higher rst period prices and lower second period prices. As a result of that in contrast to the prot and consumer welfare results obtained under full informed consumers, we show that BBPD boosts industry prots at the expense of consumer welfare.