Conditioning Prices on Purchase History

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. Our baseline model involves rational consumers with constant valuations for the good 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 feasible to price so as to distinguish high-value and low-value consumers, the merchant will never find it profitable 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.