Behavior-based price discrimination and signaling of product quality

Li, Jianpei and Zhang, Wanzhu (2022): Behavior-based price discrimination and signaling of product quality.

Abstract

We analyse a two-period model in which a monopolistic seller may adopt behavior-based price discrimination (BBPD) and charge consumers different prices based on their purchasing histories. We show that if there is quality uncertainty and prices convey valuable information about product quality, BBPD can be profitable for the seller both when the seller can and can not commit to future prices, contrasting the traditional view that the seller would like to avoid BBPD due to strategic delay of consumption on the consumers' side. BBPD increases consumers' sensitivity to a price change in the first period and enables the high type seller to signal product quality with relatively low prices, effectively reducing signaling costs in comparison to uniform pricing. In the separating equilibria that survive the intuitive criterion, first-time purchasers pay lower prices than repeat purchasers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Behavior-based Price Discrimination (BBPD); Quality Uncertainty; Signaling
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility

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