Purchase history and product personalization

TL;DR

This paper examines how product personalization influences price discrimination, revealing that controlling product variety can mitigate distortions caused by downstream price strategies in a supply chain.

Contribution

It introduces a novel upstream-downstream model analyzing the impact of purchase history on price discrimination and product line design.

Findings

Product personalization enables price discrimination but can cause distortions.

Controlling product variety can reduce adverse effects of downstream price strategies.

The model highlights the trade-off between product variety and pricing efficiency.

Abstract

Product personalization opens the door to price discrimination. A rich product line allows firms to better tailor products to consumers' tastes, but the mere choice of a product carries valuable information about consumers that can be leveraged for price discrimination. We study this trade-off in an upstream-downstream model, where a consumer buys a good of variable quality upstream, followed by an indivisible good downstream. The downstream firm's use of the consumer's purchase history for price discrimination introduces a novel distortion: The upstream firm offers a subset of the products that it would offer if, instead, it could jointly design its product line and downstream pricing. By controlling the degree of product personalization the upstream firm curbs ratcheting forces that result from the consumer facing downstream price discrimination.