Should Price Data Be Shared?

Abstract

Modern firms frequently discreetly offer consumers prices that are not visible to competitors but can be (and are often) voluntarily shared. What are the consequences of such information sharing? In this paper, we consider a model of behavior-based pricing (BBP) in which firms collect consumers' purchase history in the first period, recognize new and repeat consumers, and offer each consumer a price according to her purchase history in the second period. We analyze two regimes: the transparency regime under which firms can observe their competitors' prices and the non-transparency regime under which they cannot. We find that, first, price transparency raises the first-period prices and alleviates price competition, which benefits firms but at the expense of their consumers. Second, we find that, when firms endogenously make their data-sharing decisions, they always share their pricing data. Third, we consider a scenario with endogenous product decisions and find that price transparency increases the horizontal differentiation of products, which further alleviates market competition and benefits firms at the consumers' expense. Collectively, these results underscore the unintended negative consequences of sharing pricing data and recommend public policymakers to take a strong stance in regulating this now-common practice.

Keywords: Data sharing, behavior-based pricing, transparency, competition