Personalized Pricing and Consumer Welfare

Jean-Pierre Dubé and Sanjog Misra

Journal of Political Economy, 2023, vol. 131, issue 1, 131 - 189

Abstract: We study the welfare implications of personalized pricing implemented with machine learning. We use data from a randomized controlled pricing field experiment to construct personalized prices and validate these in the field. We find that unexercised market power increases profit by 55%. Personalization improves expected profits by an additional 19% and by 86% relative to the nonoptimized price. While total consumer surplus declines under personalized pricing, over 60% of consumers benefit from personalization. Under some inequity-averse welfare functions, consumer welfare may even increase. Simulations reveal a nonmonotonic relationship between the granularity of data and consumer surplus under personalization.

Date: 2023
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