Behavior-Based Price Discrimination with Non-Uniform Distribution of Consumer Preferences

38 Pages Posted: 10 Mar 2016 Last revised: 20 Jul 2021

See all articles by Rosa Branca Esteves

Rosa Branca Esteves

NIPE-University of Minho

Qihong Liu

University of Oklahoma - Department of Economics

Jie Shuai

Zhongnan University of Economics and Law

Date Written: July 18, 2021

Abstract

Existing theories of competition with behavior-based price discrimination (BBPD, also known as price discrimination based on purchase history), typically assume that consumer valuations are distributed uniformly. This assumption implies that the availability of BBPD creates a prisoner's dilemma in which firms are worse off and consumers better off in equilibrium, relative to uniform pricing. In this paper, we consider a wider class of consumer distributions and show that profit and welfare results change qualitatively. When consumers are sufficiently massed at the center of the market (e.g. triangular distribution), BBPD boosts industry profits at the expense of consumers. Otherwise, the usual findings prevail. Our results highlight how assumptions on the density of consumer valuations play a decisive role on pricing and welfare outcomes.

Keywords: Behavior-based price discrimination; Price discrimination based on purchase history; Non-uniform distribution of consumer preferences

JEL Classification: D43, L13, M31

Suggested Citation

Esteves, Rosa Branca and Liu, Qihong and Shuai, Jie, Behavior-Based Price Discrimination with Non-Uniform Distribution of Consumer Preferences (July 18, 2021). Available at SSRN: https://ssrn.com/abstract=2745319 or http://dx.doi.org/10.2139/ssrn.2745319

Rosa Branca Esteves

NIPE-University of Minho ( email )

Braga
Portugal

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Jie Shuai

Zhongnan University of Economics and Law ( email )

182 Nanhu Ave.
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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