Strategic pricing and quality discrimination in presence of different customer incentive programs

Abstract

By leveraging consumers’ historical data, firms can implement price discrimination based on individual characteristics. However, beyond mere price differentiation, firms may also employ quality discrimination as a means to either retain old customers or attract new ones, which we call customer incentive programs. Therefore, this study investigates the impact of different customer incentive programs on firms’ decisions, profits, and consumer surplus. Our findings reveal several key insights. First, contrary to conventional wisdom, firms may simultaneously offer lower prices and quality-improved products to new customers. Second, we discover that rewarding old customers is suboptimal for firms. When consumer patience is sufficiently high, foregoing quality discrimination emerges as a more advantageous method. Conversely, in scenarios where consumer patience is limited, rewarding new customers becomes the preferable option. Finally, permitting firms to utilize consumer data under specific conditions may be more beneficial for consumers overall from a policymaker’s perspective. However, firms might strategically choose to remain ignorant, opting not to utilize this data even when permitted. This paper provides valuable insights and recommendations for designing firms’ customer incentive programs and government data compliance policies.