Endogenous personalized pricing in the Hotelling model

We study endogenous personalized pricing in Hotelling’s model with vertically differentiated products, cost asymmetries and linear adjustment costs. We characterize the equilibrium and its welfare consequences. Adopting personalized pricing is the dominant strategy for both companies. The less effic...

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Bibliographic Details
Published in:Economics letters 2023-04, Vol.225, p.111037, Article 111037
Main Authors: Houba, Harold, Motchenkova, Evgenia, Wang, Hui
Format: Article
Language:English
Subjects:
Hotelling model
Oligopoly
Personalized prices
Profit paradox
Technology adoption
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Summary:We study endogenous personalized pricing in Hotelling’s model with vertically differentiated products, cost asymmetries and linear adjustment costs. We characterize the equilibrium and its welfare consequences. Adopting personalized pricing is the dominant strategy for both companies. The less efficient company never gains compared to competition in uniform pricing. We clarify the conditions under which the more efficient company can gain from competition in personalized pricing. Aggregate consumer surplus increases, but personalized pricing can harm consumers who purchase from the more-efficient (high-quality) firm. •We study welfare effects of pricing technologies in the asymmetric Hotelling model.•We reconsider necessary and sufficient conditions to break the Prisoners’ dilemma.•Only more efficient producers can gain due to personalized pricing, less efficient lose.•Personalized pricing can harm consumers who purchase from the more-efficient firm.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2023.111037