Personalized Pricing and Consumer Welfare

62 Pages Posted: 26 Jun 2017 Last revised: 24 Jun 2021

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Marketing Science Institute (MSI)

Sanjog Misra

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2021

Abstract

We study the welfare implications of personalized pricing, an extreme form of third-degree price discrimination implemented with machine learning for a large, digital firm. Using data from a unique randomized controlled pricing field experiment we train a demand model and conduct inference about the effects of personalized pricing on firm and consumer surplus. In a second experiment, we validate our predictions in the field. The initial experiment reveals unexercised market power that allows the firm to raise its price optimally , generating a 55% increase in profits. Personalized pricing improves the firm's expected posterior profits by an additional 19%, relative to the optimized uniform price, and by 86%, relative to the firm's unoptimized status quo price. Turning to welfare effects on the demand side, total consumer surplus declines 23% under personalized pricing relative to uniform pricing, and 47% relative to the firm's unoptimized status quo price. However, over 60% of consumers benefit from lower prices under personalization and total welfare can increase under standard inequity-averse welfare functions. Simulations with our demand estimates reveal a non-monotonic relationship between the granularity of the segmentation data and the total consumer surplus under personalization. These findings indicate a need for caution in the current public policy debate regarding data privacy and personalized pricing insofar as some data restrictions may not per se improve consumer welfare.

Keywords: price discrimination, targeting, scalable price targeting, welfare, lasso regression, weighted likelihood bootstrap, data-mining, field experiment

JEL Classification: C11,C55, C93, D4, L11, M3

Suggested Citation

Dube, Jean-Pierre H. and Misra, Sanjog, Personalized Pricing and Consumer Welfare (June 24, 2021). Available at SSRN: https://ssrn.com/abstract=2992257 or http://dx.doi.org/10.2139/ssrn.2992257

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

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Marketing Science Institute (MSI) ( email )

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Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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