On the profitability of behaviour-based price discrimination under purchase-dependent preferences

Abstract

We study optimal monopoly pricing of non-durable goods over two periods when consumer preferences evolve endogenously. We introduce a propensity for a second purchase that defines the influence of the first-period purchase on the second-period willingness to pay for the product, reflecting either satiation or habit. With this setting, second-period demand depends on first-period purchase and price, raising a dynamic pricing problem. Optimal pricing is analyzed with, at the second period, either uniform pricing or price discrimination between past and new buyers. We show that the propensity for a second purchase affects the capacity of the monopoly to commit on the pricing scheme and on second-period prices. In particular, the monopoly, if able, cannot escape from discriminating between past and new buyers at the second period. However, this pricing scheme is more profitable for the monopoly, as compared to uniform pricing, if there is strong enough satiation. Moreover, the monopoly can commit on second-period prices only with uniform pricing and habit. These results contrast with the standard literature on dynamic pricing and behaviour-based price discrimination.