Consumer Scores and Price Discrimination
Name
scores.pdf
Description
Submitted version
Size
760.81 KB
Format
Adobe PDF
Checksum (MD5)
ebe7793ac91e1927a440a3ffd26eb2e7
Author(s)
Bonatti, Alessandro
Cisternas, Gonzalo
Date Issued
August 2019
Journal
Review of Economic Studies
Publisher
Oxford University Press (OUP)
Citation
Bonatti, Alessandro and Gonzalo Cisternas. “Consumer Scores and Price Discrimination.” Review of Economic Studies, 87, 2 (August 2019): 750–791 © 2019 The Author(s)
Version
Original manuscript
Abstract
We study the implications of aggregating consumers' purchase histories into scores that proxy for unobserved willingness to pay. A long-lived consumer interacts with a sequence of firms. Each firm relies on the consumer's current score-a linear aggregate of noisy purchase signals - to learn about her preferences and to set prices. If the consumer is strategic, she reduces her demand to manipulate her score, which reduces the average equilibrium price. Firms in turn prefer scores that overweigh past signals relative to applying Bayes' rule with disaggregated data, as this mitigates the ratchet effect and maximizes the firms' ability to price discriminate. Consumers with high average willingness to pay benefit from data collection, because the gains from low average prices dominate the losses from price discrimination. Finally, hidden scores - those only observed by the firms - reduce demand sensitivity, increase average prices, and reduce consumer surplus, sometimes below the naive-consumer level.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1093/RESTUD/RDZ046
