Should Firms Employ Personalized Pricing?

The recent developments in information technology (IT) have enabled firms to employ personalized pricing. Should all firms employ personalized pricing even though the adaptation costs of such pricing strategies are not high? This paper theoretically demonstrates a situation in which all firms do not always employ personalized pricing even though the fixed costs to do so is zero. The model is based on those of Thisse and Vives (1988) and Shaffer and Zhang (2002). Our model incorporates the fact that firms engage in marginal cost-reducing activities after they decide whether to employ personalized pricing. As employing personalized pricing induces the rival firm to engage more in reducing its costs, to mitigate the cost-reducing activities of firms, the less-efficient firm should not employ personalized pricing. Our main result indicates that such firms should take into account their relative competitive positions and technological environments. When firms are small, they would need to reconsider whether to employ personalized pricing