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Conditioning Prices on Purchase History

Author

Listed:
  • Alessandro Acquisti

    (H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Hal R. Varian

    (School of Information Management and Systems, University of California, Berkeley, California 94720)

Abstract
The rapid advance in information technology now makes it feasible for sellers to condition their price offers on consumers’ prior purchase behavior. In this paper we examine when it is profitable to engage in this form of price discrimination when consumers can adopt strategies to protect their privacy. Our baseline model involves rational consumers with constant valuations for the goods being sold and a monopoly merchant who can commit to a pricing policy. Applying results from the prior literature, we show that although it is to price so as to distinguish high-value and low-value consumers, the merchant will never find it to do so. We then consider various generalizations of this model, such as allowing the seller to offer enhanced services to previous customers, making the merchant unable to commit to a pricing policy, and allowing competition in the marketplace. In these cases we show that sellers will, in general, find it profitable to condition prices on purchase history.

Suggested Citation

  • Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
    • Handle: RePEc:inm:ormksc:v:24:y:2005:i:3:p:367-381
    DOI: 10.1287/mksc.1040.0103
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    More about this item

    Keywords

    Internet marketing; personalized marketing; price discrimination; targeting; privacy;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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