Rosa Branca Esteves

Price Discrimination with Private and Imperfect Information

This paper investigates the competitive and welfare effects of information accuracy improvements in markets where firms can price discriminate after observing a private and noisy signal about a consumers brand preference. I show that firms charge more to customers they believe have a brand preference for them, and that this price has an inverted-U shaped relationship with the signals accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signals accuracy rises. While industry profit and overall welfare fall monotonically as price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus. The model is also extended to a public information setting. For any level of the signals accuracy, moving from public to private information boosts industry profit and welfare at the expense of consumer surplus.

Customer poaching and advertising

This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.

Behavior-based price discrimination with retention offers

This paper is a first step in investigating the competitive and welfare effects of behavior-based price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to avoid the switching of their clientele to a competitor. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When retention strategies are allowed, forward looking firms anticipate the effect of first period market share on second period profits and price more aggressively in the first-period. Thus, first period equilibrium price under BBPD with retention strategies is below its non-discrimination counterpart. This contrasts with first period price above the non-discrimination level if BBPD is used and retention activity is forbidden. Regarding second period prices, the use of retention offers increase the price offered to those consumers who do not signal am intention to switch; the reverse happens to those consumers who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of BBPD is bad for profits and welfare but good for consumers. BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.

Behavior-based pricing under imperfectly informed consumers

This paper is a first look at the dynamic effects of behavior-based price discrimination in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. We show that in comparison to no discrimination, firms reduce their advertising efforts, charge higher first period prices and lower second period prices. As a result of that in contrast to the profit and consumer welfare results obtained under full informed consumers, we show that behavior-based price discrimination boosts industry profits at the expense of consumer welfare.