Personalized Pricing and Consumer Welfare

62 Pages Posted: 11 Sep 2017 Last revised: 28 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: September 2017

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.

Suggested Citation

Dube, Jean-Pierre H. and Misra, Sanjog, Personalized Pricing and Consumer Welfare (September 2017). Available at SSRN: https://ssrn.com/abstract=3035110

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

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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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