Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts

Simon Anderson, University of Virginia, Alicia Baik, University of Virginia and Nathan Larson, American University

We study list price competition when firms can individually target consumer discounts (at a cost) afterwards, and we address recent privacy regulation (like the GDPR) allowing consumers to choose whether to opt-in to targeting. Targeted consumers receive poaching and retention discount offers. Equilibrium discount offers are in mixed strategies, but only two firms vie for each contested consumer and final profits on them are Bertrand-like. When targeting is unrestricted, firm list pricing resembles monopoly. For plausible demand conditions and if targeting costs are not too low, firms and consumers are worse off with unrestricted targeting than banning it. However, targeting induces higher (lower) list prices if demand is convex (concave), and either side of the market can benefit if list prices shift enough in its favor. Given the choice, consumers opt in only when expected discounts exceed privacy costs. Under empirically plausible conditions, opt-in choice makes all consumers better off.