Economic Theory and Experimental Seminar - Simon Anderson (University of Virginia)

Title: Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts (joint with Alicia Baik and Nathan Larson)

Abstract: We study list price competition when firms can individually target discounts (at a cost) to consumers afterwards. Consumers endogenously separate into two types: captives cannot be profitably poached, while contesteds receive poaching offers and retention counter-offers. In equilibrium, these discount offers are in mixed strategies, but only two firms vie for each contested consumer and the final profits on them are simple and Bertrand-like. More contestable consumers receive more ads and are more likely to buy the wrong product. Poaching exceeds retention when targeting is expensive, but this reverses when targeting is cheap. Firm list pricing resembles monopoly, as marginal consumers are lost to the lowest feasible poaching offer, not to another firm's list price. Cheaper targeting drives list prices higher if captive demand is convex but has no impact on list prices in a spatial context with linear-quadratic transport costs. Targeting improves aggregate consumer surplus if cheap, but may make every consumer worse-off if expensive. Cheaper targeting reduces profits unless demand is log-convex, in which case it can constitute a facilitating practice. In the free-targeting limit, most consumers are better off with targeting than without. We add a consumer demand for privacy to determine when opt-in regulation is desirable.