Personalized Pricing of an e‐Tailer in the Presence of Identity Management

ABSTRACT Advanced information technology allows e‐tailers to impose personalized pricing based on consumer information. However, consumers generally have an aversion to price discrimination and someone even strategically bypasses the tailored price by identity management. This paper constructs a supply chain with one e‐tailer and one manufacturer, in which the e‐tailer decides whether to impose personalized pricing or uniform pricing. We will study the pricing strategy of the e‐tailer and examine the impacts of personalized pricing on the manufacturer, supply chain, consumers, and social welfare. Our analysis reveals that (i) the e‐tailer imposes personalized pricing if there is a low proportion of new consumers and imposes uniform pricing otherwise; (ii) the manufacturer has an incentive to subsidize the e‐tailer to implement personalized pricing when the proportion of new consumers is medium; (iii) personalized pricing may benefit new consumers and old consumers who bypass the tailored price via identity management, while it always hurts old consumers who purchase with the tailored price. Additionally, we discuss two different cases: endogenous quality and centralized system, finding that (iv) the manufacturer strategically decreases the (product) quality level when the e‐tailer imposes personalized pricing; and (v) channel decentralization diminishes the e‐tailer's incentive to impose personalized pricing.