Personalized Pricing and Competition

We study personalized pricing (or first-degree price discrimination) in a general oligopoly model. In the short-run, when the market structure is fixed, the impact of personalized pricing hinges on the degree of market coverage. If coverage is high, personalized pricing intensifies competition and so harms firms but benefits consumers, whereas the opposite is true if coverage is low. However, in the long-run, when the market structure is endogenous, personalized pricing always benefits consumers because it induces the socially optimal level of firm entry. We also study the asymmetric case where some firms can use consumer data to price discriminate while others cannot, and show it can be worse for consumers than when either all or no firms can personalize prices.

Andrew Rhodes, Jidong Zhou