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Personalized Pricing and Consumer Welfare

Journal: Journal of Political Economy

Date: 20230101

Author: Dube, Jean-Pierre; Misra, Sanjog

Abstract:
We study the welfare implications of personalized pricing implemented with machine learning. We use data from a randomized controlled pricing field experiment to construct personalized prices and validate these in the field. We find that unexercised market power increases profit by 55%. Personalization improves expected profits by an additional 19% and by 86% relative to the nonoptimized price. While total consumer surplus declines under personalized pricing, over 60% of consumers benefit from personalization. Under some inequity-averse welfare functions, consumer welfare may even increase. Simulations reveal a nonmonotonic relationship between the granularity of data and consumer surplus under personalization.

Link: Google Scholar

Key Findings

Market Power & Pricing

Field experiment reveals significant unexercised market power - optimal uniform pricing increases profits by 55% compared to status quo $99 price

Personalized Pricing Benefits

Personalized pricing increases firm profits by 19% compared to optimal uniform pricing, and by 86% compared to status quo pricing

Consumer Welfare Impact

While total consumer surplus declines 23% under personalization, over 60% of consumers benefit from lower prices, and welfare improves under inequality-averse metrics

Revenue Impact of Different Price Points

  • Monthly revenues per customer increase significantly with higher prices
  • Revenue peaks at $399 monthly price point
  • Status quo $99 price point leaves substantial money on the table

Conversion Rates Across Price Points

  • Conversion rates decline gradually as prices increase
  • Even at $399, 11% of customers still convert
  • Price elasticity is lower than expected, supporting higher optimal prices

Consumer Welfare Under Different Pricing Schemes

  • Personalized pricing reduces total consumer surplus by 23% vs uniform pricing
  • However, 63% of consumers receive lower prices under personalization
  • Inequality-averse welfare metrics show positive impact from personalization

Contribution and Implications

  • First empirical documentation of scalable personalized pricing implementation and welfare effects
  • Demonstrates that personalized pricing can benefit both firms and many consumers
  • Suggests data privacy regulations should carefully consider welfare implications rather than treating personalized pricing as universally harmful
  • Provides framework for analyzing distributional effects of price discrimination

Data Sources

  • Revenue Chart: Constructed using data from Table 7 showing realized revenues per customer across price points
  • Conversion Chart: Based on Table 5 acquisition rate data from September 2015 experiment
  • Welfare Chart: Derived from Table 8(a) showing consumer welfare changes under different inequality aversion parameters