Consumer Scores and Price Discrimination

Abstract

We study the implications of aggregating consumers’ purchase histories into scores that proxy for unobserved willingness to pay. A long-lived consumer interacts with a sequence of firms. Each firm relies on the consumer’s current score–a linear aggregate of noisy purchase signals—to learn about her preferences and to set prices. If the consumer is strategic, she reduces her demand to manipulate her score, which reduces the average equilibrium price. Firms in turn prefer scores that overweigh past signals relative to applying Bayes’ rule with disaggregated data, as this mitigates the ratchet effect and maximizes the firms’ ability to price discriminate. Consumers with high average willingness to pay benefit from data collection, because the gains from low average prices dominate the losses from price discrimination. Finally, hidden scores—those only observed by the firms—reduce demand sensitivity, increase average prices, and reduce consumer surplus, sometimes below the naive-consumer level.

Markets for Information: An Introduction

“…As information collection is free, the intermediary is always able to extract a positive price from the sellers. Bonatti and Cisternas (2018) further show that, by increasing the persistence of the consumer's score relative to the Bayesian benchmark, the intermediary is able to mitigate the ratchet effect. This allows her to collect more informative signals from the consumer, which are in turn more valuable for the sellers.…”

“…Along these lines, Bonatti and Cisternas (2018) study how aggregating the information about purchase histories into a consumer score impacts the ratchet effect. They do so in a continuous-time model with a changing consumer type and discriminatory, but linear, prices.…”

Competing data intermediaries

“…Kim (2018) incorporates privacy concerns and competition on an advertising platform. Bonatti and Cisternas (2020) study the aggregation of consumers' purchase histories in a dynamic model. De Cornière and Taylor (2020) employ the competition-inutilities approach to study competition and data.…”

Pricing and Public Policy Issues

“…Companies often adjust their basic prices to accommodate differences among customers, products, locations, and several other factors (Bonatti & Cisternas, 2020). For example, Lands' End offers men's shirts in different styles, prices, weights, and levels of quality.…”