When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model

• Type: Article in International Scientific Journal
• Date: 2022-12

Authors

Laussel, D (Author) Other; Joana Resende (Author) FEP

Journal

Title: Management Science

Vol. 68 No. 12

Pages: 8872-8888

ISSN: 0025-1909

Publisher: Institute for Operations Research and the Management Sciences

Indexing

ISI Web of Knowledge - 12 Citations

Other information

Authenticus ID: P-00W-ZA8

DOI: 10.1287/mnsc.2022.4298

Abstract (EN): This paper investigates duopoly competition when horizontally differentiated firms are able to make personalized product-price offers to returning customers, within a behavior-based discrimination model. In the second period, firms can profile old customers according to their preferences, selling them targeted products at personalized prices. Product-price personalization (PP) allows firms to retain all old customers, eliminating second-period customer poaching. The overall profit effects of PP are shown to be ambiguous. In the second period, PP improves the matching between customers??? preferences and firms??? offers, but firms do not make any revenues in the rival???s turf. In the Bertrand outcome, second-period profits only increase for both firms if the size of their old turfs are not too different or initial products are not too differentiated. However, the additional secondperiod profits may be offset by lower first-period profits. PP is likely to increase firms??? overall discounted profits when consumers??? (firms???) discount factor is low (high) and firms??? initial products are exogenous and sufficiently different. When the location of initial products is endogenous, profits are hurt because of an additional location (strategic) effect aggravating head-to-head competition in the first period. Likewise, when a fraction of active consumers conceals their identity, PP increases second-period profits at the cost of aggressive first-period price competition. Finally, we show that the room for profitable PP enlarges considerably if firms rely on PP as an effective device to sustain tacit collusive outcomes, with firms credibly threatening to respond to first-period price deviations with

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 18