Price discrimination with consumer misperception

The rise of big data and sophisticated, machine learning algorithms is increasing the prevalence of price discrimination and even personalized pricing. In traditional models, where consumers' willingness-to-pay (WTP) is a function of preferences (and budget constraints), price discrimination is...

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Bibliographic Details
Published in:Applied economics letters 2021-06, Vol.28 (10), p.829-834
Main Author: Bar-Gill, Oren
Format: Article
Language:English
Subjects:
behavioural economics
Big Data
Budget constraint
consumer misperceptions
Consumers
Discrimination
Economic analysis
Economic theory
Economics
Price discrimination
Scrutiny
Segmentation
Willingness to pay
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Summary:The rise of big data and sophisticated, machine learning algorithms is increasing the prevalence of price discrimination and even personalized pricing. In traditional models, where consumers' willingness-to-pay (WTP) is a function of preferences (and budget constraints), price discrimination is often celebrated for increasing efficiency albeit while reducing consumer surplus. This favourable view of price discrimination should be re-evaluated when WTP is a function of both preferences and misperceptions. With demand-inflating misperceptions, price discrimination is even more harmful to consumers and might reduce efficiency. These results are derived using a simple, linear demand model with different levels of price discrimination (or segmentation). In the many consumer markets where misperception is common, more careful scrutiny of price discrimination is warranted.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2020.1782333