Regulatory Instruments for Fair Personalized Pricing

TL;DR

This paper explores regulatory policies for personalized pricing, proposing price caps to balance market efficiency and fairness, supported by theoretical proofs and empirical validation.

Contribution

It introduces two regulatory instruments—price range and ratio caps—and analyzes their effects on market outcomes under various demand distributions.

Findings

Both constraints help balance consumer and producer surplus.

Constraints can reduce total social welfare.

Empirical results confirm theoretical predictions.

Abstract

Personalized pricing is a business strategy to charge different prices to individual consumers based on their characteristics and behaviors. It has become common practice in many industries nowadays due to the availability of a growing amount of high granular consumer data. The discriminatory nature of personalized pricing has triggered heated debates among policymakers and academics on how to design regulation policies to balance market efficiency and equity. In this paper, we propose two sound policy instruments, i.e., capping the range of the personalized prices or their ratios. We investigate the optimal pricing strategy of a profit-maximizing monopoly under both regulatory constraints and the impact of imposing them on consumer surplus, producer surplus, and social welfare. We theoretically prove that both proposed constraints can help balance consumer surplus and producer surplus at the expense of total surplus for common demand distributions, such as uniform, logistic, and exponential distributions. Experiments on both simulation and real-world datasets demonstrate the correctness of these theoretical results. Our findings and insights shed light on regulatory policy design for the increasingly monopolized business in the digital era.