Consumer flexibility, data quality and targeted pricing

Geza Sapi () and Irina Suleymanova

No 117, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: We investigate how firms' incentives to acquire customer data for targeted offers depend on its quality. A two-dimensional Hotelling model is proposed where consumers are heterogeneous both with respect to their locations and transportation cost parameters (flexibility). Firms have perfect data on the locations of consumers while data on their flexibility is imperfect. When consumers are relatively homogeneous in their flexibility, in equilibrium both firms acquire customer data regardless of its quality. This increases profits but harms consumers. When consumers are relatively differentiated in flexibility, data acquisition incentives depend on its quality. Only if the data is sufficiently precise, both firms acquire it and their profits decrease, while consumers are better-off. Our model has particular relevance for location-based marketing such as in mobile telephony, where firms have near-perfect information on the proximity of customers but may have imperfect knowledge of other consumer characteristics.

Keywords: Price Discrimination; Customer Data; Market Segmentation (search for similar items in EconPapers)
JEL-codes: D43 L13 L15 O30 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-com, nep-cta and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:117

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