Personalized Pricing and Consumer Welfare

Jean-Pierre Dubé and Sanjog Misra

No 23775, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the welfare implications of personalized pricing, an extreme form of third-degree price discrimination implemented with machine learning for a large, digital firm. Using data from a unique randomized controlled pricing field experiment we train a demand model and conduct inference about the effects of personalized pricing on firm and consumer surplus. In a second experiment, we validate our predictions in the field. The initial experiment reveals unexercised market power that allows the firm to raise its price optimally, generating a 55% increase in profits. Personalized pricing improves the firm's expected posterior profits by an additional 19%, relative to the optimized uniform price, and by 86%, relative to the firm's unoptimized status quo price. Turning to welfare effects on the demand side, total consumer surplus declines 23% under personalized pricing relative to uniform pricing, and 47% relative to the firm's unoptimized status quo price. However, over 60% of consumers benefit from lower prices under personalization and total welfare can increase under standard inequity-averse welfare functions. Simulations with our demand estimates reveal a non-monotonic relationship between the granularity of the segmentation data and the total consumer surplus under personalization. These findings indicate a need for caution in the current public policy debate regarding data privacy and personalized pricing insofar as some data restrictions may not per se improve consumer welfare.

JEL-codes: C11 C55 C93 D4 L11 M3 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-big, nep-com and nep-exp
Note: IO PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Jean-Pierre Dubé & Sanjog Misra, 2023. "Personalized Pricing and Consumer Welfare," Journal of Political Economy, vol 131(1), pages 131-189.

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