The Perils of Behavior-Based Personalization
Author(s)
Zhang, Juanjuan
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“Behavior-based personalization” has gained popularity in recent years, whereby businesses offer personalized products based on consumers' purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day 1, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day 1, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms' better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.
Date issued
2010-12Department
Sloan School of ManagementJournal
Marketing Science
Publisher
Institute for Operations Research and the Management Sciences
Citation
Zhang, J. “The Perils of Behavior-Based Personalization.” Marketing Science 30 (2010): 170-186. Web. 16 Dec. 2011.
Version: Author's final manuscript
ISSN
0732-2399
1526-548X