Price Discrimination with Consumer Misperception

Forthcoming, Applied Economics Letters

Harvard Law School John M. Olin Center Discussion Paper No. 1033

12 Pages Posted: 1 Jul 2020

Date Written: June 6, 2020

Abstract

The rise of big data and sophisticated, machine learning algorithms is increasing the prevalence of price discrimination and even personalized pricing. In traditional models, where consumers’ willingness-to-pay (WTP) is a function of preferences (and budget constraints), price discrimination is often celebrated for increasing efficiency albeit while reducing consumer surplus. This favorable view of price discrimination should be reevaluated when WTP is a function of both preferences and misperceptions. With demand-inflating misperceptions, price discrimination is even more harmful to consumers and might reduce efficiency. These results are derived using a simple, linear demand model with different levels of price discrimination (or segmentation). In the many consumer markets where misperception is common, more careful scrutiny of price discrimination is warranted.

Keywords: Price discrimination, segmentation, consumer misperceptions, behavioral economics, big data

JEL Classification: L11, L12, L40, L4

Suggested Citation

Bar-Gill, Oren, Price Discrimination with Consumer Misperception (June 6, 2020). Forthcoming, Applied Economics Letters , Harvard Law School John M. Olin Center Discussion Paper No. 1033, Available at SSRN: https://ssrn.com/abstract=3617310

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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