Market Dominance and Behavior-Based Pricingunder Horizontal and Vertical Differentiation

We evaluate behavior-based price discrimination from an antitrust perspective by focusing on an industry with inherited market dominance. Under horizontal differentiation, behavior-based pricing does not by itself lead to persistence of dominance unless the dominant firm is protected by significantly higher switching costs than its small rival. This result continues to hold even if the dominant firm can use behavior-based pricing to compete against an entrant with no access to consumers’ purchase histories. Under vertical differentiation, behavior-based pricing enhances the dominance of the high-quality seller and hence consumer welfare.