Behavior and characteristic-based price discrimination

We develop a model of behavior- and characteristic-based discriminatory pricing\r\nwhere consumers are heterogeneous both in tastes and in price sensitivity. Each firmis\r\nable to distinguish between the consumers that have bought from it and those that have\r\nbought from the rival. Furthermore, each firm learns the price sensitivity of their own\r\nconsumers. We show that using this additional information may yield higher profits\r\nthan uniform pricing provided that consumers are heterogeneous enough with respect\r\nto price sensitivity. We also discuss consumer surplus implications of such behaviorand\r\ncharacteristic-based price discrimination, and we show that the impact of price\r\ndiscrimination depends on both the consumer type and the level of consumers’ heterogeneity.