Irrelevance of personalized pricing under strategic market segmentation

TL;DR

This paper demonstrates that under certain incentive constraints, a multiproduct seller cannot profit from personalized pricing through market segmentation, with implications for credence-good markets and communication strategies.

Contribution

It provides a theoretical characterization showing the irrelevance of personalized pricing under specific incentive-compatibility constraints in strategic market segmentation.

Findings

Personalized pricing offers no benefit when incentive constraints are met.

The maximum equilibrium profits are characterized explicitly.

The irrelevance result fails if seller's incentive constraints are relaxed.

Abstract

A multiproduct seller is more informed than consumers about the value of her products to consumers. The seller posts a price list and segments the market through cheap-talk communication. We find that when both seller's and consumers' incentive-compatibility constraints are satisfied, the seller cannot benefit from personalized pricing (i.e., third-degree price discrimination). Based on that observation, we provide a tractable characterization of seller's maximum equilibrium profits. We apply our analysis to a credence-good setup and discuss when the credence goods seller benefits from communication. The irrelevance result breaks down when we relax seller's incentive-compatibility constraints.