Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263940 
Year of Publication: 
2022
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2022-020/VII
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
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 differentiated 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.
Subjects: 
Industrial Organization
Personalized Prices
Artificial Intelligence
Technology Adaption
Profit Paradox
JEL: 
L1
D43
L13
Document Type: 
Working Paper

Files in This Item:
File
Size
621.11 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.