Should Firms Employ Personalized Pricing?

31 Pages Posted: 4 Apr 2013

See all articles by Toshihiro Matsumura

Toshihiro Matsumura

University of Tokyo - Institute of Social Science

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER)

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Date Written: April 2, 2013

Abstract

The recent developments in information technology (IT) have enabled firms to employ personalized pricing. Should all firms employ personalized pricing even though the adaptation costs of such pricing strategies are not high? This paper theoretically demonstrates a situation in which all firms do not always employ personalized pricing even though the fixed costs to do so is zero. The model is based on those of Thisse and Vives (1988) and Shaffer and Zhang (2002). Our model incorporates the fact that firms engage in marginal cost-reducing activities after they decide whether to employ personalized pricing. As employing personalized pricing induces the rival firm to engage more in reducing its costs, to mitigate the cost-reducing activities of firms, the less-efficient firm should not employ personalized pricing. Our main result indicates that such firms should take into account their relative competitive positions and technological environments. When firms are small, they would need to reconsider whether to employ personalized pricing.

Keywords: personalized pricing, heterogeneity, cost reductions, game theory

JEL Classification: M31, L13, D43

Suggested Citation

Matsumura, Toshihiro and Matsushima, Noriaki, Should Firms Employ Personalized Pricing? (April 2, 2013). ISER Discussion Paper No. 869. Available at SSRN: https://ssrn.com/abstract=2243385

Toshihiro Matsumura

University of Tokyo - Institute of Social Science ( email )

Hongo 7-3-1
Tokyo, TOKYO 113-0033
Japan

Noriaki Matsushima (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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