Information, mis-information, and history-based price discrimination in a duopoly

Abstract

In this paper, we analyze the competitive and welfare effects of imperfect consumer recognition based on the consumers' purchase history in a duopoly model with discrete brand preferences and switching costs. We demonstrate that the impact of consumer recognition on firms' pricing strategies, industry profits, and welfare crucially depends on the accuracy of consumer recognition, i.e., the relative magnitude of correct and incorrect consumer recognition. An increase in the extent of incorrect recognition softens the competition if it is less than that of correct recognition; otherwise, it intensifies the competition. The impact of the accuracy of the information on consumer surplus and welfare follows from price and profit effects. We also analyze asymmetric price discrimination and the optimal strategies of a data broker if firms purchase consumer recognition technology from it.