Endogenous Third-Degree Price Discrimination in a Supply Chain with One Common Manufacturer and Duopoly Retailers

Assuming the two retailers decide whether to acquire information to segment consumers and price them differently, we investigate the problem of information acquisition and third-degree price discrimination in the supply chain composed of one common manufacturer and duopoly retailers. We explore how the supply chain members’ pricing decisions are affected by the fraction of high price-sensitivity consumers and the consumers’ difference in price sensitivity. Analytical results show that the manufacturer’s wholesale price increases with the fraction of high price-sensitivity consumers and decreases with the consumers’ difference in price sensitivity. Moreover, if a retailer chooses to acquire information and price discriminate, the retail prices for two types of consumers increase with the fraction of high price-sensitivity consumers. However, the retail price for consumers with high (low) price sensitivity decreases (increases) with the consumers’ difference in terms of price sensitivity. By comparing the results among different information acquisition and price discrimination decisions, we find that there exist two possible equilibrium decisions for both retailers: both retailers acquire information and price discriminate and no retailer acquires information and each charges a uniform price for all consumers. The strategy which dominates depends on the fraction of high price-sensitivity consumers and the consumers’ difference in price sensitivity. However, compared with no retailer acquiring information, the manufacturer is better off when two retailers acquire information. Consequently, the manufacturer designs a fixed fee contract to stimulate retailers to price discriminate and to achieve a win-win situation for them finally.

Banning Price Discrimination under Imperfect Competition: Evidence from Colombia's Broadband

Economic theory is inconclusive regarding the effects of banning third-degree price discrimination under imperfect competition because they depend on how the competing firms rank their market segments. When, relative to uniform pricing, all competitors want higher prices in the same market segments, a ban on price discrimination will reduce profits and benefit some consumers at the expense of others. If, instead, some firms want to charge higher prices in segments where their competitors want to charge lower prices, price discrimination increases competition driving all prices down. In this case, forcing the firms to charge uniform prices can increase their profits and reduce consumer surplus. We use data on Colombian broadband subscriptions to estimate the demand for internet services. Estimated preferences and assumptions about competition are used to simulate a scenario in which firms lose their ability to price discriminate. Our results show large effects on consumer surplus and large effects on firms’ profits. Aggregate profits increase but the effects for individual firms are heterogeneous. The effects on consumer welfare vary by city. In most cities, a uniform price regime causes large welfare transfers from low-income households towards high-income households and in a few cities, prices in all segments rise. Poorer households respond to the increase in prices by subscribing to internet plans with slower download speed.

EXPRESS: The Importance of Price Beliefs in Consumer Search

A consumer’s decision to engage in search depends on the beliefs the consumer has about an unknown product characteristic such as price. Given beliefs are rarely observed, researchers typically assume that consumers have rational expectations or update beliefs consistent with Bayesian updating. These assumptions are not only restrictive, but additionally, do not afford the researcher, or the retailer, an opportunity to price discriminate among consumers based on heterogeneity in beliefs. We first show, through Monte Carlo experiments, how these assumptions impact estimates of search cost. Next, we design an incentive-aligned online study where subjects search over the price of a homogeneous good, and we elicit distributions of price beliefs before and after each search. Based on data collected from a nationally representative panel, we find substantial heterogeneity in prior price beliefs. We find that subjects update their beliefs in response to search outcomes, but they deviate from Bayesian updating in that they under-react to new information. Importantly, we show that (i) assuming Bayesian updating does not significantly bias search cost estimates at the aggregate level provided the researcher accounts for heterogeneous prior beliefs, (ii) eliciting heterogeneity in prior expected prices is much more important than eliciting heterogeneity in prior price uncertainty, and (iii) a retailer can increase profits through third-degree price discrimination by recognizing the heterogeneity in prior beliefs.

The privacy problem for internalizing behavioral externalities

Providers of insurance used to have no other choice than to absorb the behavioral externalities of their policy-holders. New technology coupled with the incentives of low-risk consumers has made it possible for firms to price-discriminate on the basis of behavioral risk and thus internalize behavioral externalities. While cost-internalization is generally a positive development, the introduction of behavioral tracking technologies also introduces new economic and social costs. This paper explores the economic and moral trade-offs of adopting behavioral tracking technologies in various insurance settings.

Persuasion Through Selective Disclosure: Implications for Marketing, Campaigning, and Privacy Regulation

This paper models how firms or political campaigners (senders) persuade consumers and voters (receivers) by selectively disclosing information about their offering depending on individual receivers' preferences and orientations. We derive positive and normative implications depending on the extent of competition among senders, whether receivers are wary of senders collecting personalized data, and whether firms are able to personalize prices. We show how both senders and receivers can benefit from selective disclosure. Privacy laws requiring senders to obtain consent to acquire personal information that enables such selective disclosure increases receiver welfare if and only if there is little or asymmetric competition among senders, if receivers are unwary, and if firms can price discriminate. This paper has been accepted by Joshua Gans, business strategy.

Competitive Personalized Pricing

We study a model where each competing firm has a target segment where it has full consumer information and can exercise personalized pricing, and consumers may engage in identity management to bypass the firm’s attempt to price discriminate. In the absence of identity management, more consumer information intensifies competition because firms can effectively defend their turf through targeted personalized offers, thereby setting low public prices offered to nontargeted consumers. But the effect is mitigated when consumers are active in identity management because it raises the firm’s cost of serving nontargeted consumers. When firms have sufficiently large and nonoverlapping target segments, identity management can enable firms to extract full surplus from their targeted consumers through perfect price discrimination. Identity management can also induce firms not to serve consumers who are not targeted by either firm when the commonly nontargeted market segment is small. This results in a deadweight loss. Thus, identity management by consumers can benefit firms and lead to lower consumer surplus and lower social welfare. Our main insight continues to be valid when a fraction of consumers are active in identity management or when there is a cost of identity management. We also discuss the regulatory implications for the use of consumer information by firms as well as the implications for management. This paper was accepted by Juanjuan Zhang, marketing.

Pricing Network Effects: Competition

We study the practice of influencer marketing in oligopoly markets and its effect on market efficiency. In our model, each consumer is influenced by choices of a subset of other consumers. Firms gather information on consumers’ influence and price discriminate using this information. In equilibrium, firms charge premia/subsidize below-/ above-average-influential consumers; the premia/discounts depend on the strength of network effects and on how much information firms have on consumers’ influence. Influencer marketing leads to inefficient consumer-product matches. Firms’ investments in information are strategic complements, leading to a race for information acquisition that erodes welfare and firms’ profits but increases consumer surplus. (JEL D11, D21, D43, D83, D85, L13, M31)

Is the Cure Worse than the Disease? Unintended Effects of Payment Reform in a Quantity-Based Transfer Program

Quantity vouchers are used in redistributive programs to shield participants from price variation and alter their consumption patterns. However, because participants are insensitive to prices, vendors of program goods are incentivized to price discriminate between program and non-program customers. I study these trade-offs in the context of a reform to reduce price discrimination in the Supplemental Nutrition Program for Women, Infants, and Children (WIC), which provides a quantity voucher for nutritious foods to low-income mothers and children. The reform caused vendors to drop out, reducing program take-up. In addition, smaller vendors increased prices charged to non-WIC shoppers by 6.4 percent. (JEL H75, I18, I32, I38, J13, J16)

The Case for a Progressive Benefits Tax

Opponents of redistributive taxation have long supported a “benefits” tax, which would tax individuals in accordance with the market value of the benefits they receive from the government. The question is, what market? A perfectly competitive market in which goods and services are priced at their marginal cost of production? A quasi-monopolistic market in which the supplier (here, the state) can price-discriminate among customers based on their willingness to pay? Some third alternative? Depending upon the answer, a benefits tax could yield radically different distributions of the tax burden, from a regressive to a steeply progressive rate structure. Benefits tax proponents have opted for a perfectly competitive market, but their own laissez-faire precommitments support a different answer, with radically different implications for the “right” rate structure.

ACCESS TO DIGITAL CAR DATA AND COMPETITION IN AFTERMARKET MAINTENANCE SERVICES

Before the arrival of digital car data, car manufacturers had already partly foreclosed the maintenance market through franchising contracts with a network of exclusive official dealers. EU regulation endorsed this foreclosure but mandated access to maintenance data for independent service providers to keep competition in these markets. The arrival of digital car data upsets this balance because manufacturers can collect real-time maintenance data on their servers and send messages to drivers. These can be used to price discriminate and increase the market share of official dealers. There are at least four alternative technical gateways that could give independent service providers similar data access options. However, they suffer in various degrees from data portability issues, switching costs and weak network effects, and insufficient economies of scale and scope in data analytics. Multisided third-party consumer media platforms appear to be better placed to overcome these economic hurdles, provided that an operational real-time data portability regime could be established.