Personalized Pricing and Distribution Strategies

The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between, alternative distribution channels, which in turn has implications for firms' distribution strategies. We develop a formal model to examine a brand manufacturer's choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intrabrand competition between vertically related firms are thus in stark contrast to those obtained for interbrand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniformprice. By contrast, under personalized pricing, mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices.

Automated summary

The availability of consumer data leads to the adoption of personalized pricing policies by an increasing number of firms, which affects the performance and competition between distribution channels. A formal model is developed to examine the choice between mono distribution and dual distribution for brand manufacturers, considering different demand patterns and pricing regimes. The study finds that dual distribution is optimal in many cases, especially when channels are horizontally differentiated and both manufacturer and retailer charge personalized prices.