Behavior-Based Personalized Pricing: Consumer Privacy Concerns and Information Structure

Abstract

With the availability of consumer data and advanced data analytics techniques, firms are increasingly implementing personalized pricing, raising significant concerns about consumer privacy. In this study, we build an analytical model to investigate the effect of consumer privacy concerns and market information structure on profits and the consumer surplus when firms use personalized pricing. Contrary to the conventional wisdom, our results show that greater privacy concerns may lead to a higher consumer surplus as they intensify the poaching competition between firms. From the information structure perspective, we find that exclusive access to a greater amount of consumer data can be detrimental to firms and beneficial for consumers. Surprisingly, compared with conventional uniform pricing, we show that personalized pricing can lead to a larger consumer surplus even with greater consumer privacy concerns. We discuss the relevant managerial implications.