Conditioning Prices on Purchase History

Privacy and Security, Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot

Author(s)

Alessandro Acquisti and Hal R. Varian

Source

SIMS Working Paper, 2002; Marketing Science, 2004.

Summary

This paper asks when sellers will tend to charge different prices to different buyers.

Policy Relevance

Some firms can use information about consumers to offer more personalized services and different prices, and consumers can benefit from this.

Main Points

  • Firms like supermarkets and airlines track customer’s purchases and use the information to design offers for individual customers, “targeted marketing.” Firms might charge different prices to different customers, “price discrimination.”
     
    • Traditional firms offering personal service based on specific knowledge of individual customers included barbers and doctors. Technology now makes personalization automatic.
       
  • Customers can avoid price discrimination by refusing to join a loyalty club or erasing cookies after they venture online. Some predict that sellers would find price discrimination unprofitable. This raises the question of why firms invest in technology to collect data about consumers.
     
  • Sellers might offer benefits like free shipping and other personalized services to encourage consumers to reveal information. When they do, firms can benefit more from price discrimination.
     
  • Consumers might think that banning price discrimination means they would pay lower prices, but policies that make tracking unworkable could mean that all consumers pay higher prices.
     
    • When a customer willing to pay more can easily imitate those only willing to pay less,  firms will tend to charge more across the board, otherwise the firm will reap no high-price sales.
       
  • Competing firms might offer personalized services to “lock in” customers willing to pay more.  Amazon.com, which personalizes more than rivals, seems to avoid losing customers this way.
     
  • Travel, online sales, and supermarkets tend to offer more personalization. Computerized sales mean their information is current, they often have repeat buyers, buying anonymously is hard, and the cost of offering personalization is low.

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