Personalized Pricing and Customer Welfare

49 Pages Posted: 26 Jun 2017 Last revised: 21 Feb 2020

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Sanjog Misra

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2019

Abstract

Abstract We study the welfare implications of personalized pricing, an extreme form of third-degree price discrimination implemented with machine learning for a large, digital firm. We conduct a randomized controlled pricing field experiment to train a demand model and to conduct inferences about the effects of personalized pricing on firm and customer surplus. In a second experiment, we validate our predictions out of sample. Personalized pricing improves the firm's expected posterior profits by 19%, relative to optimized uniform pricing, and by 86%, relative to the firm's status quo pricing. On the demand side, customer surplus declines slightly under personalized pricing relative to a uniform pricing structure. However, over 60% of customers benefit from personalized prices that are lower than the optimal uniform price. Based on simulations with our demand estimates, we find several cases where customer surplus increases when the firm is allowed to condition on more customer features and classify customers into more granular segments. These findings indicate a need for caution in the current public policy debate regarding data privacy and personalized pricing. Some data restrictions could harm consumers and even reduce total consumer welfare.

Keywords: price discrimination, targeting, scalable price targeting, welfare, lasso regression, weighted likelihood bootstrap, data-mining, field experiment

JEL Classification: C11,C55, C93, D4, L11, M3

Suggested Citation

Dube, Jean-Pierre H. and Misra, Sanjog, Personalized Pricing and Customer Welfare (August 3, 2019). Available at SSRN: https://ssrn.com/abstract=2992257 or http://dx.doi.org/10.2139/ssrn.2992257

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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