When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model

This paper investigates duopoly competition when horizontally differentiated firms are able to make personalized product-price offers returning customers, within a behavior-based discrimination model. In the second period, can profile old customers according their preferences, selling them targeted products at prices. Product-price personalization (PP) allows retain all eliminating second-period customer poaching. The overall profit effects of PP shown be ambiguous. improves matching between customers’ preferences and firms’ offers, but do not any revenues in rival’s turf. Bertrand outcome, profits only increase for both if size turfs too different or initial differentiated. However, additional may offset by lower first-period profits. is likely discounted consumers’ (firms’) discount factor low (high) exogenous sufficiently different. When location endogenous, hurt because an (strategic) effect aggravating head-to-head first period. Likewise, fraction active consumers conceals identity, increases cost aggressive price competition. Finally, we show that room profitable enlarges considerably rely on as effective device sustain tacit collusive outcomes, with credibly threatening respond deviations relocations standard products. was accepted Matthew Shum, marketing. Funding: D. Laussel gratefully acknowledges support French National Research Agency [Grant ANR-17-EURE-0020] Excellence Initiative Aix-Marseille University A*MIDEX]. J. Resende supported Portuguese public funds [Project Reference NORTE-01-0145-FEDER-028540] through FCT (Fundação para Ciência e Tecnologia) POCI-01-0145-FEDER-006890]. Supplemental Material: online appendix available https://doi.org/10.1287/mnsc.2022.4298 .