Purchase History and Product Personalization

Abstract

The trade-off between product personalization and price discrimination is at the center of the debate about the use of consumer data. Whereas firms use consumer data for product personalization, allowing the firm to better meet consumers' needs, consumer data in the form of purchase histories is also used for personalized pricing. Policy makers note that rich product lines may compensate for the costs of personalized pricing. Absent from this debate is that consumer data in the form of purchase histories is endogenously determined. On the one hand, the data is selected as it reflects the consumer's trade-off between a better product match and the costs of price discrimination. On the other hand, the firm designs which products the consumer can choose from, thereby controlling how informative purchase histories may be about the consumer's preferences.