DP15969 Purchase history and product personalization

Author(s): Laura Doval, Vasiliki Skreta
Publication Date: March 2021
Keyword(s): Dynamic Mechanism Design, information design, Limited Commitment, price discrimination, product-line design
JEL(s): D84, D86, L12, L13, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15969

Product personalization opens the door to price discrimination. A rich product line allows for higher consumer satisfaction, but the mere choice of a product carries valuable information about the consumer that the firm can leverage for price discrimination. Controlling the degree of product personalization provides the firm with an additional tool to curb ratcheting forces arising from consumers' awareness of being price discriminated. Indeed, a firm's inability to not engage in price discrimination introduces a novel distortion: The firm offers a subset of the products that it would offer if, instead, the firm could commit to not price discriminate. Doing so gives commitment power to the firm: By 'pooling' consumers with different tastes to the same variety the firm commits not to learn their tastes.