When Personalized Pricing Backfires: Endogenous Adoption, Data-Cost Asymmetry, and Demand Concentration

Abstract

This manuscript studies how data-use-cost asymmetry and demand concentration jointly shape the endogenous adoption and welfare effects of personalized pricing. We analyze a Hotelling duopoly in which firms choose between uniform and personalized pricing. One firm has a lower marginal cost of converting consumer data into individualized prices, and consumer preferences are either uniformly distributed or concentrated around the market center. Moving from uniform to triangular preferences makes personalization more likely, but mainly through asymmetric adoption: the data-efficient firm personalizes while its higher-cost rival remains with uniform pricing over a much larger set of parameters. The mechanism is demand-side concentration: targeted offers become most valuable precisely where consumers are easiest to switch. The welfare implications also change. Under uniform preferences, allowing personalized pricing raises aggregate consumer surplus whenever it is adopted. Under triangular preferences, by contrast, personalized pricing can increase the efficient firm's profit while reducing both the rival's profit and consumer surplus. The results show that personalized pricing is most likely to backfire when data-use capabilities are asymmetric and many consumers are close to the competitive margin.

Keywords: Competitive Price discrimination, Data-use costs, Hotelling competition, Demand concentration, consumer surplus, Digital markets.