Personalized Pricing and Quality Customization

CeDER Working Paper No. 06-06

50 Pages Posted: 2 Apr 2006 Last revised: 25 Nov 2008

See all articles by Anindya Ghose

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business

Ke-Wei Huang

National University of Singapore - Department of Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2008

Abstract

We embed the principal-agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness-to-pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for non-loyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is non-monotonic in valuations such that some low valuation consumers get higher surplus than high valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus.

Keywords: Competitive strategy, Personalized pricing, Non-linear pricing, Price discrimination, One-to-One marketing, Product Quality, Customization

JEL Classification: D43, D82, L11, L13, L15

Suggested Citation

Ghose, Anindya and Huang, Ke-Wei, Personalized Pricing and Quality Customization (October 1, 2008). CeDER Working Paper No. 06-06. Available at SSRN: https://ssrn.com/abstract=894465 or http://dx.doi.org/10.2139/ssrn.894465

Anindya Ghose (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Ke-Wei Huang

National University of Singapore - Department of Information Systems ( email )

COM2, 04-18
Singapore 117543
Singapore
6516-2786 (Phone)
6779-7365 (Fax)

HOME PAGE: http://www.comp.nus.edu.sg/~huangkw/

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