Working Paper: CEPR ID: DP17139
Authors: Bruno Jullien; Markus Reisinger; Patrick Rey
Abstract: The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between alternative distribution channels, which in turn has implications for firms' distribution strategies. We develop a formal model to examine a brand manufacturer's choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intra-brand competition between vertically related firms are thus in stark contrast to those obtained for inter-brand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniform price. By contrast, under personalized pricing mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices.
Keywords: personalized pricing; distribution strategies; vertical contracting; downstream competition
JEL Codes: L22; L24; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Personalized pricing (D49) | choice of distribution strategy (D39) |
| demand patterns (C69) | optimal distribution strategy (D39) |
| wholesale pricing (L11) | intrabrand competition (L13) |
| wholesale pricing (L11) | firm profits (L21) |
| Personalized pricing (D49) | intrabrand competition (L13) |
| Personalized pricing (D49) | firm profitability (L21) |
| Hybrid pricing regime (P22) | industry profit (D33) |