Personalized Pricing and Quality Customization
Anindya Ghose and
Ke‐Wei Huang
Journal of Economics & Management Strategy, 2009, vol. 18, issue 4, 1095-1135
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 nonloyal 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 nonmonotonic 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.
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (45)
Downloads: (external link)
https://doi.org/10.1111/j.1530-9134.2009.00239.x
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:18:y:2009:i:4:p:1095-1135
Ordering information: This journal article can be ordered from
http://www.blackwell ... ref=1058-6407&site=1
Access Statistics for this article
More articles in Journal of Economics & Management Strategy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery (contentdelivery@wiley.com).