Superior Knowledge, Price Discrimination, and Customer Inspection

Xi Li () and Zibin Xu ()
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Xi Li: Faculty of Business and Economics, University of Hong Kong, Hong Kong
Zibin Xu: College of Business, City University of Hong Kong, Hong Kong

Marketing Science, 2022, vol. 41, issue 6, 1097-1117

Abstract: Firms in many industries obtain superior knowledge of customer preferences through industry experience or data analytics, whereas customers often need costly efforts to learn their match values. In this paper, we examine the situations under which a customer chooses whether to inspect upon observing her personalized price from a firm with superior knowledge. On the surface, it seems that the firm can use personalized prices to directly communicate the customers’ match value, and thus there is no need for customers to expend inspection efforts. However, we find that in equilibrium the firm may trick low-preference customers into overpaying more than their match value, even when the inspection cost is low. The opportunistic incentives induce customer suspicions, which may lead to excessive customer inspection that would be avoided if the firm were not capable of price discrimination. Therefore, personalized pricing cannot obviate customer inspection. Since inspection cost raises a deadweight loss in social welfare, public policies that prevent firms from price-discriminating against customers may benefit both firms and customers.

Keywords: superior knowledge; price discrimination; customer inspection; consumer privacy; signaling (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:41:y:2022:i:6:p:1097-1117

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