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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14761
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| Title: | Personalized Pricing and Quality Design |
| Authors: | Ghose, Anindya
Huang, Ke-Wei |
| Keywords: | Competitive strategy
Personalized marketing
Non-linear pricing
Price discrimination
Quality design |
| Issue Date: | Mar-2006 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | CeDER-06-06 |
| Abstract: | We develop an analytical framework to investigate the competitive
implications of personalized pricing and quality allocation (PPQ),
whereby firms charge different prices and offer different qualities to
different consumers, based on their willingness to pay. We embed PPQ in
a model of spatial differentiation, and show how information about
consumer preferences affects multi-product
firmsÃÂâÃÂÃÂÃÂÃÂ
choices over pricing schedules and product line offerings. We show that
firmsÃÂâÃÂÃÂÃÂÃÂ
optimal pricing strategies with PPQ will be non-monotonic in consumer
valuations. Our model sheds light on the different product quality
schedules offered by firms, given that one or both firms implement PPQ.
Contrary to prior literature on one-to-one marketing, we show that even
symmetric firms can avoid the well-known
PrisonerÃÂâÃÂÃÂÃÂÃÂs
Dilemma problem due to the quality enhancement effect at the individual
consumer level. The rent extraction effect due to quality enhancement
dominates the adverse effect of price competition. Moreover, this result
is stronger when firms have a larger proportion of loyal consumers. When
both firms have PPQ, consumer surplus is non-monotonic in valuations
such that some low valuation consumers get higher surplus than high
valuation consumers. For a wide range of fixed costs, we also
demonstrate some results on the profitability of adopting PPQ and show
the emergence of asymmetric equilibria, where one firm adopts PPQ and
the other firm does not when the number of loyal customers is less than
a critical value. We extend our analysis to asymmetric firms and show
that when one firm adopts PPQ, it always increases its quality level
while the other firm keeps its quality schedule unchanged compared to
when neither firm has PPQ. We demonstrate that a firm with an ex-ante,
smaller loyal segment can be better off with PPQ. |
| URI: | http://hdl.handle.net/2451/14761 |
| Appears in Collections: | CeDER Working Papers
IOMS: Information Systems Working Papers
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