Thursday, August 18, 2022
Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically diferentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.