Conditioning Prices on Purchase History

By Alessandro Acquisti, Hal R. Varian. 2005

746 citations recorded by the source corpus.

The rapid advance in information technology now makes it feasible for sellers to condition their price offers on consumers' prior purchase behavior. In this paper we examine when it is profitable to engage in this form of price discrimination when consumers can adopt strategies to protect their privacy. Our baseline model involves rational consumers with constant valuations for the goods being sold and a monopoly merchant who can commit to a pricing policy. Applying results from the prior literature, we show that although it is feasible to price so as to distinguish high-value and low-value consumers, the merchant will never find it optimal to do so. We then consider various generalizations of this model, such as allowing the seller to offer enhanced services to previous customers, making the merchant unable to commit to a pricing policy, and allowing competition in the marketplace. In these cases we show that sellers will, in general, find it profitable to condition prices on purchase history.

Subfields: Management Science and Operations Research, Marketing, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/fc7c76fb954fda3f589e688c21390dc75b593081

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In Management Science and Operations Research

In Marketing

In Strategy and Management

Citations in the corpus

Online advertising and privacy (2014, positive): “Although reminiscent of results by Taylor (2004), Acquisti and Varian (2005), Hermalin and Katz (2006), Calzolari and Pavan (2006), the latter effect stems from a different logic. The aforementioned papers have the following structure: (i) the seller observes a signal about the consumer’s type, eith”
Price Discrimination and Competition (2007, background): “Acquisti and Varian (2005) study a general model of pricing conditional on purchase history and its application in marketing.”
Privacy in electronic commerce and the economics of immediate gratification (2004, background): “Since [28, 37, 29] economists have been interested in privacy, but only recently formal models have started appearing [3, 7, 39, 40].”
Targeted Advertising and Advertising Avoidance (2011, neutral): “A number of papers have explored this idea of price targeting in either monopolistic or oligopolistic settings, such as Bester and Petrakis (1996), Fudenberg and Tirole (2000), Taylor (2004), and Acquisti and Varian (2005).”
Behavior-Based Price Discrimination and Customer Recognition (2007, background): “5 See also Acquisti and Varian (2005) for results focusing on the role of commitment (see below) and the effect of being able to offer enhanced services.”
Is There a Cost to Privacy Breaches? An Event Study (2006, background): “Several recent studies (Campbell et al. [2003], Hovava and D’Arcy [2003], Cavusoglu et al. [2002], Kannan et al.”
The Economics of Information Security (2006, background): “Acquisti and Varian analyzed the market conditions under which first-degree price discrimination can actually be profitable [ 27 ]: It may thrive in industries with wide”