Behavior based price personalization under vertical product differentiation

We study price personalization in a two period duopoly with vertically differentiated products. In the second period, firm not only knows purchase history of all customers, as standard Behavior Based Price Discrimination models, but it also collects detailed information on its old using to engage personalization. The analysis reveals that there exists natural market for each firm, defined set customers cannot be poached by rival period. equilibrium is unique, except when firms are ex-ante almost identical. equilibrium, largest poaches from rival. This has highest profits necessarily share. Aggregate lower than under uniform pricing. All consumers gain, total welfare higher herein pricing if firms’ markets sufficiently asymmetric. low quality chooses minimal level and differential arises, though exact choice high depends upon cost specification.