Advertisement

Price discrimination based on purchase behavior and service cost in competitive channels

  • Man Xu
  • Wansheng TangEmail author
  • Chi Zhou
Focus
  • 40 Downloads

Abstract

With the recent emergence of cloud computing and big data technologies, collection of consumers’ information is widespread. Retailers use consumers’ purchase history and consumptive habits data to price discriminate between current and new, high-cost and low-cost consumers. We investigate behavior-based pricing (BBP) and consumers cost-based pricing (CCP) simultaneously in a competitive two-period market in which bricks and clicks retailers sell products to high-cost-type and low-cost-type consumers during two periods. We examine how the price discrimination affects the channel members’ prices, market shares and profits. We find that dual price discriminations (BBP and CCP) decrease the service cost advantage retailer’s profit, but increase the service cost disadvantage retailer’s profit if the consumer’s travel cost is low. Compared the market shares of retailers, it is interesting that a cost advantage retailer serves more type-H consumers under the case of BBP and CCP than other cases. In addition, our results illustrate that cost disadvantage retailers prefer to reward the current consumers in the second period. Additionally, we find that consumers may benefit from price discrimination that they face a lower price in the case of BBP and CCP than other cases under certain conditions. Even more egregious, the current type-H consumers served by the cost advantage retailer enjoy a lower price than the type-L consumers served by the competitor.

Keywords

Price discrimination Behavior-based pricing Consumer cost-based pricing Bricks and clicks channels Competition 

Notes

Acknowledgements

This work was supported by the National Natural Science Foundation of China (Nos. 71771164 and 71702129), Humanity and Social Science Youth Foundation of Ministry of Education of China (No. 17YJC630232).

Compliance with ethical standards

Conflict of interest

All authors declare that they have no conflict of interest.

Human and animal rights

This article does not contain any studies with human participants or animals performed by any of the authors.

References

  1. Acquisti A, Varian HR (2005) Conditioning prices on purchase history. Mark Sci 24(3):367–381CrossRefGoogle Scholar
  2. Bread PM-W (2016) 8 ways retailers are tracking your every move. Money (September 23). http://time.com/money/4506297/howretailerstrackyou
  3. Caillaud B, De Nijs R (2014) Strategic loyalty reward in dynamic price discrimination. Mark Sci 33(5):725–742CrossRefGoogle Scholar
  4. Chen Y (2008) Dynamic price discrimination with asymmetric firms. J Ind Econ 56(4):729–751CrossRefGoogle Scholar
  5. Chen Y, Zhang ZJ (2009) Dynamic targeted pricing with strategic consumers. Int J Ind Organ 27(1):43–50CrossRefGoogle Scholar
  6. Chen H, Yan Y, Liu Z, Xing T (2018a) Effect of risk attitude on out-sourcing leadership preferences with demand uncertainty. Soft Comput 22(16):5263–5278CrossRefzbMATHGoogle Scholar
  7. Chen J, Liang L, Yao DQ (2018b) Factory encroachment and channel selection in an outsourced supply chain. Int J Prod Econ.  https://doi.org/10.1016/j.ijpe.2018.05.003
  8. Choe C, King S, Matsushima N (2017) Pricing with cookies: behavior-based price discrimination and spatial competition. Manag Sci 64(12):5669–5687CrossRefGoogle Scholar
  9. Fazli A, Shulman JD (2018) Implications of market spillovers. Manag Sci 64(11):4996–5013CrossRefGoogle Scholar
  10. Forsyth J, Gupta A, Haldar S, Marn MV (2000) Shedding the commodity mind-set. McKinsey Quart 37(4):78–86Google Scholar
  11. Fudenberg D, Tirole J (2000) Customer poaching and brand switching. RAND J Econ 31(4):634–657CrossRefGoogle Scholar
  12. Hartmann WR, Viard VB (2008) Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program. Quant Mark Econ 6(2):109–137CrossRefGoogle Scholar
  13. Kim BD, Shi M, Srinivasan K (2001) Reward programs and tacit collusion. Mark Sci 20(2):99–120CrossRefGoogle Scholar
  14. Kireyev P, Kumar V, Ofek E (2017) Match your own price? Self-matching as a retailers multichannel pricing strategy. Mark Sci 36(6):908–930CrossRefGoogle Scholar
  15. Kuksov D, Lin Y (2010) Information provision in a vertically differentiated competitive marketplace. Mark Sci 29(1):122–138CrossRefGoogle Scholar
  16. Lehmann-Grube U (1997) Strategic choice of quality when quality is costly: the persistence of the high-quality advantage. RAND J Econ 28(2):372–384CrossRefGoogle Scholar
  17. Li KJ (2018) Behavior-based pricing in marketing channels. Mark Sci 37(2):310–326CrossRefGoogle Scholar
  18. Moorthy KS (1988) Product and price competition in a duopoly. Mark Sci 7(2):141–168CrossRefGoogle Scholar
  19. Musalem A, Joshi YV (2009) Research note how much should you invest in each customer relationship? A competitive strategic approach. Mark Sci 28(3):555–565CrossRefGoogle Scholar
  20. Pazgal A, Soberman D (2008) Behavior-based discrimination: Is it a winning play, and if so, when? Mark Sci 27(6):977–994CrossRefGoogle Scholar
  21. Parlar M (1988) Game theoretic analysis of the substitutable product inventory problem with random demands. Nav Res Logist (NRL) 35(3):397–409MathSciNetCrossRefzbMATHGoogle Scholar
  22. Popescu I, Wu Y (2007) Dynamic pricing strategies with reference effects. Oper Res 55(3):413–429MathSciNetCrossRefzbMATHGoogle Scholar
  23. Rhee KE, Thomadsen R (2016) Behavior-based pricing in vertically differentiated industries. Manag Sci 63(8):2729–2740CrossRefGoogle Scholar
  24. Rust RT, Zeithaml VA, Lemon KN (2000) Driving customer equity: how customer lifetime value is reshaping corporate strategy. Free Press, New YorkGoogle Scholar
  25. Seligman TJ, Taylor JD (2000) FTC Reverses Privacy Policy. New York Law J, June 19. www.loeb.com/CM/Articles/articles24.asp
  26. Shaked A, Sutton J (1982) Relaxing price competition through product differentiation. Rev Econ Stud 49(1):3–13MathSciNetCrossRefzbMATHGoogle Scholar
  27. Shin J, Sudhir K (2010) A customer management dilemma: When is it profitable to reward one’s own customers? Mark Sci 29(4):671–689CrossRefGoogle Scholar
  28. Shin J, Sudhir K, Yoon DH (2012) When to “fire” customers: customer cost-based pricing. Manag Sci 58(5):932–947CrossRefGoogle Scholar
  29. Shin J, Sudhir K (2013) Should you punish or reward current customers? MIT Sloan Manag Rev 55(1):59–64Google Scholar
  30. Subramanian U, Raju JS, Zhang ZJ (2013) The strategic value of high-cost customers. Manag Sci 60(2):494–507CrossRefGoogle Scholar
  31. Tan Y, Carrillo JE (2017) Strategic analysis of the agency model for digital goods. Prod Oper Manag 26(4):724–741CrossRefGoogle Scholar
  32. Taylor CR (2004) Consumer privacy and the market for customer information. RAND J Econ 35(4):631–650CrossRefGoogle Scholar
  33. Villas-Boas JM (1999) Dynamic competition with customer recognition. Rand J Econ 30(4):604–631CrossRefGoogle Scholar
  34. Zhang J (2011) The perils of behavior-based personalization. Mark Sci 30(1):170–186MathSciNetCrossRefGoogle Scholar
  35. Zhang K, Sarvary M (2015) Differentiation with user-generated content. Manag Sci 61(4):898–914CrossRefGoogle Scholar
  36. Zhou C, Tang W, Zhao R (2015) Optimal consumer search with prospectutility in hybrid uncertain environment. J Uncertain Anal Appl 3(6):1–20Google Scholar
  37. Zhou C, Tang W, Zhao R (2017) Optimal consumption with reference-dependent preferences in on-the-jobsearch and savings. J Ind Manag Optim 13(1):503–527MathSciNetGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.College of Management and EconomicsTianjin UniversityTianjinChina
  2. 2.School of ManagementTianjin University of TechnologyTianjinChina

Personalised recommendations