Personalized Pricing and Quality Customization

41 Pages Posted: 26 Oct 2009

See all articles by Anindya Ghose

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business

Ke-Wei Huang

National University of Singapore - Department of Information Systems

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Abstract

We embed the principal–agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness to pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for nonloyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is nonmonotonic in valuations such that some low-valuation consumers get higher surplus than high-valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher-quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus.

Suggested Citation

Ghose, Anindya and Huang, Ke-Wei, Personalized Pricing and Quality Customization. Journal of Economics & Management Strategy, Vol. 18, Issue 4, pp. 1095-1135, Winter 2009. Available at SSRN: https://ssrn.com/abstract=1492379 or http://dx.doi.org/10.1111/j.1530-9134.2009.00239.x

Anindya Ghose (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Ke-Wei Huang

National University of Singapore - Department of Information Systems ( email )

COM2, 04-18
Singapore 117543
Singapore
6516-2786 (Phone)
6779-7365 (Fax)

HOME PAGE: http://www.comp.nus.edu.sg/~huangkw/

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