Working Paper: NBER ID: w23775
Authors: Jean-Pierre Dub; Sanjog Misra
Abstract: We study the welfare implications of personalized pricing, an extreme form of third-degree price discrimination implemented with machine learning for a large, digital firm. Using data from a unique randomized controlled pricing field experiment we train a demand model and conduct inference about the effects of personalized pricing on firm and consumer surplus. In a second experiment, we validate our predictions in the field. The initial experiment reveals unexercised market power that allows the firm to raise its price optimally, generating a 55% increase in profits. Personalized pricing improves the firm's expected posterior profits by an additional 19%, relative to the optimized uniform price, and by 86%, relative to the firm's unoptimized status quo price. Turning to welfare effects on the demand side, total consumer surplus declines 23% under personalized pricing relative to uniform pricing, and 47% relative to the firm's unoptimized status quo price. However, over 60% of consumers benefit from lower prices under personalization and total welfare can increase under standard inequity-averse welfare functions. Simulations with our demand estimates reveal a non-monotonic relationship between the granularity of the segmentation data and the total consumer surplus under personalization. These findings indicate a need for caution in the current public policy debate regarding data privacy and personalized pricing insofar as some data restrictions may not per se improve consumer welfare.
Keywords: personalized pricing; consumer welfare; third-degree price discrimination; machine learning; field experiments
JEL Codes: C11; C55; C93; D4; L11; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uniform pricing (D41) | firm profits (L21) |
| personalized pricing (D49) | total consumer surplus (D11) |
| personalized pricing (D49) | firm profits (L21) |
| uniform pricing (D41) | total consumer surplus (D11) |
| firm's unoptimized status quo price (D41) | total consumer surplus (D11) |
| personalized pricing (D49) | consumer benefits (D18) |