Dynamic targeted pricing with strategic consumers

Abstract

We investigate in this paper whether dynamic targeted pricing based on consumer purchase history could benefit a practicing firm even when consumers are "strategic" in that they actively seek to avail themselves of a low price in the future. Such strategic behavior on the part of consumers has been shown in the literature to render such dynamic targeted pricing unprofitable, even for a monopoly firm. We show that dynamic targeted pricing can benefit competing firms, when they actively pursue customer recognition based on consumer purchase history. This is because in order to pursue customer recognition, competing firms need to price high to "screen out" price-sensitive consumers and hence price competition is moderated. As a result, all competing firms can become better off with targeted pricing than without even when consumers behave strategically. Interestingly, because of this competition moderation effect, the paradoxical outcome occurs where dynamic targeted pricing may not benefit a monopolist, but it may benefit competing firms. We also show that dynamic targeted pricing can expand the market such that social welfare unambiguously improves. © 2008 Elsevier B.V. All rights reserved.