Personalized Pricing and Quality Design

Abstract

We develop an analytical framework to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby rms charge di¤erent prices and o¤er di¤erent qualities to di¤erent consumers, based on their willingness to pay. We embed PPQ in a model of spatial di¤erentiation, and show how information about consumer preferences a¤ects multi-product rms choices over pricing schedules and product line o¤erings. We show that consumer surplus with PPQ will be non-monotonic in consumer valuations. Our model sheds light on the di¤erent product quality schedules o¤ered by rms, given that one or both rms implement PPQ. Contrary to prior literature on one-to-one marketing, we show that even symmetric rms can avoid the well-known Prisoner s Dilemma problem due to the quality enhancement e¤ect at the individual consumer level. The rent extraction e¤ect due to quality enhancement dominates the adverse e¤ect of price competition. Moreover, this result is stronger when rms have a larger proportion of loyal consumers. When both rms have PPQ, consumer surplus is non-monotonic in valuations such that some low valuation consumers get higher surplus than high valuation consumers. We extend our analysis to asymmetric rms and show that when one rm adopts PPQ, it always increases its quality level while the other rm keeps its quality schedule unchanged compared to the case when neither rm has PPQ. We demonstrate that a rm with an ex-ante, smaller loyal segment can be better o¤ with PPQ.