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

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