Flexibility-based price discrimination in a competitive context considering consumers’ socioeconomic status

Abstract

This study examines the impact of flexibility-based price discrimination (FBPD) on the pricing and quality strategy of the adopting firm and its competitor, as well as the impact on the welfare of consumers. We assume that the inflexible consumers being targeted for price discrimination can be either high-income consumers or low-income consumers, and the high-income consumers are more sensitive to product quality. We show that depending on who the targeted inflexible consumers are, the impact of FBPD on all firms and consumers can be either negative or positive. If an FBPD is to exploit the inflexibility of low-income consumers, it will not only make the vulnerable group even more disadvantaged but also lower the firms’ incentive to produce high-quality products. On the contrary, if an FBPD is to exploit the inflexibility of high-income consumers, it will increase the firms’ incentive to produce high-quality products, and the targeted consumers will be compensated by having higher quality products. However, the firms might engage in excessive quality enhancement, leading to a situation where the competition between the firms falls into a prisoner’s dilemma. Our research results suggest that the application of FBPD could necessitate a comprehensive regulatory framework to ensure ethical implementation while safeguarding consumer welfare, particularly that of vulnerable groups.