Behavior-Based Pricing for Competing Firms Facing Variety-Seeking Consumers

Many firms adopt behavioral-based pricing (BBP) to customize prices for both existing and new consumers whose valuations of products are influenced by the variety-seeking behavior, that is, the tendency to pursue diversity in brand or product choices. While this behavior is common in practice, it remains underexplored in the literature. To investigate BBP in markets with variety-seeking consumers, we develop a two-period model involving two competing firms. Our findings reveal that when firms adopt BBP, a greater degree of variety-seeking among consumers mitigates first-period price competition, resulting in higher profits for the firms. The adoption of BBP increases profits when consumers exhibit a high variety-seeking degree, enhances consumer welfare when this degree is low, and can lead to mutually beneficial outcomes for both the firms and consumers. If a firm unilaterally adopts BBP, its competitor benefits when the consumer's variety-seeking degree is high. In scenarios where the firms can strategically decide whether to adopt BBP, asymmetric equilibria may arise, with only one firm choosing to implement it. The firms may strategically adopt BBP without necessarily price-discriminating consumers, as the potential for price discrimination can reduce first-period competition. When BBP is exogenously feasible, the firms experience higher profits in relation to the consumer's variety-seeking degree compared with when it is not feasible, with gains from BBP feasibility increasing as the degree of variety-seeking rises. In addition, with behavioral-based personalized pricing, that is, the firms can charge tailored prices to existing consumers, profits also increase with the consumer's variety-seeking degree. However, with behavioral-based services, that is, firms can customize prices for both new and past consumers and provide additional services to previous customers, as the consumers variety-seeking degree increases, service levels decline while profits initially decrease before they rise again. These findings highlight the distinct characteristics of BBP and elucidate various real-world operational strategies.