The Perils of Behavior-Based Personalization

Juanjuan Zhang

Marketing Science, 2011, vol. 30, issue 1, 170-186

Abstract: "Behavior-based personalization" has gained popularity in recent years, whereby businesses offer personalized products based on consumers' purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day 1, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day 1, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms' better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.

Keywords: behavior-based personalization; behavior-based price discrimination; revealed preference; segmentation; targeting; competition; customer relationship management; endogenous information generation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (74)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:30:y:2011:i:1:p:170-186

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