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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27742
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| Title: | Personalized Pricing and Quality Differentiation |
| Authors: | Choudhary, Vidyanand
Ghose, Anindya
Mukhopadhyay, Tridas
Rajan, Uday |
| Keywords: | personalized pricing
quality differentiation |
| Issue Date: | 6-Nov-2008 |
| Series/Report no.: | CeDER-PP-2006-04 |
| Abstract: | We develop an analytical framework to investigate the competitive
implications of personalized pricing (PP), whereby firms charge
different prices to different consumers based on their willingness to
pay. We embed PP in a model of vertical product differentiation and show
how it affects firms’ choices over quality. We show that
firms’ optimal pricing strategies with PP may be nonmonotonic in
consumer valuations. When the PP firm has high quality, both firms raise
their qualities relative to the uniform pricing case. Conversely, when
the PP firm has low quality, both firms lower their qualities. Although
many firms are trying to implement such pricing policies, we find that a
higher-quality firm can actually be worse off with PP. While it is
optimal for the firm adopting PP to increase product differentiation,
the non-PP firm seeks to reduce differentiation by moving in closer in
the quality space. While PP results in a wider market coverage, it also
leads to aggravated price competition between firms. Because this
entails a change in equilibrium qualities, the nature of the cost
function determines whether firms gain or lose by implementing such PP
policies. Despite the threat of first-degree price discrimination, we
find that PP with competing firms can lead to an overall increase in
consumer welfare. |
| URI: | http://hdl.handle.net/2451/27742 |
| Appears in Collections: | CeDER Published Papers
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