Competition when big data allow for personalized pricing and product customization

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  • Competition when big data allow for personalized pricing and product customization 
    (with Mai Thi Nguyen-Ones and Hans Jarle Kind)
  • Abstract:
    Big data provides more accurate (individual) consumer information, and consequently may improve firms’ ability to introduce personalized pricing (1. degree price discrimination) and product customization (reduce consumers’ mismatch costs). In a duopoly model a la Hotelling (1929) we show that a firm’s incentive to customize its product is independent of its own choice between personalized pricing or uniform pricing. A firm chooses product customization if and only if the rival uses personalized pricing. If firms do not choose customization endogenously, both firms choose personalized pricing, and this is a prisoners’ dilemma as shown by Thisse and Vives (1988). We show that this outcome may be significantly changed when firms choose customization after their choice of personalized pricing or not.