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Personalized Pricing and Distribution Strategies

Author

Listed:
  • Jullien, Bruno
  • Reisinger, Markus
  • Rey, Patrick
Abstract
The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between alternative distribution channels, which in turn has implications for firms' distribution strategies. We develop a formal model to examine a brand manufacturer's choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intra-brand competition between vertically related firms are thus in stark contrast to those obtained for inter-brand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniform price. By contrast, under personalized pricing mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices.

Suggested Citation

  • Jullien, Bruno & Reisinger, Markus & Rey, Patrick, 2022. "Personalized Pricing and Distribution Strategies," CEPR Discussion Papers 17139, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17139
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    3. Navarra, Federico & Pino, Flavio & Sandrini, Luca, 2024. "Mandated data-sharing in hybrid marketplaces," ZEW Discussion Papers 24-051, ZEW - Leibniz Centre for European Economic Research.
    4. Qiuyu Lu & Noriaki Matsushima, 2023. "Personalized pricing when consumers can purchase multiple items," ISER Discussion Paper 1192, Institute of Social and Economic Research, Osaka University.
    5. Foros, Øystein & Kind, Hans Jarle & Nguyen-Ones, Mai, 2024. "The choice of pricing format: Firms may choose uniform pricing over personalized pricing to induce rivals to soften competition," Information Economics and Policy, Elsevier, vol. 66(C).
    6. Chen, Claire Y.T. & Sun, Edward W. & Miao, Wanyu & Lin, Yi-Bing, 2024. "Reconciling business analytics with graphically initialized subspace clustering for optimal nonlinear pricing," European Journal of Operational Research, Elsevier, vol. 312(3), pages 1086-1107.
    7. Harold Houba & Evgenia Motchenkova & Hui Wang, 2022. "Personalized Pricing, Competition and Welfare," Tinbergen Institute Discussion Papers 22-020/VII, Tinbergen Institute.

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    More about this item

    Keywords

    Personalized pricing; Distribution strategies; Vertical contracting; Downstream competition;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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