Who benefits from behavior-based pricing? A duopoly market analysis of online platforms and chain stores

Purpose With the rapid growth of e-commerce and big data technologies, firms increasingly leverage consumers' historical purchasing behavior to implement price discrimination, commonly referred to as behavior-based pricing (BBP). This study examines whether BBP benefits online platforms and offline chain stores and identifies which party is the most suitable implementer of BBP from the perspectives of firm profits, consumer surplus and social welfare. Design/methodology/approach We develop a Salop model in which chain stores, wholly owned by a single corporation, are located along the circumference, while the e-commerce platform is positioned at the center of the circle, capturing the consumer segmentation between these two asymmetrically competing firms. In addition, we establish a two-period game to analyze changes in consumer purchasing behavior, which also allows firms to implement BBP based on consumers' past behavior. Findings Interestingly, we find that BBP does not always benefit firms. Although it helps segment consumers, it can intensify online-offline price competition and push firms toward pricing strategy convergence. Counterintuitively, we find that consumers are not always worse off under BBP discrimination. By switching channels across periods, they may benefit from price discrimination. Consumer surplus is maximized when the chain stores adopt BBP and the e-commerce platform uses uniform pricing. From a social welfare perspective, unilateral BBP by the e-commerce platform is optimal under high logistics costs, while unilateral BBP by chain stores dominates under low logistics costs. For moderate logistics costs, mutual uniform pricing yields the highest social welfare. Originality/value These findings provide insights into which market participant is the more suitable implementer of behavior-based pricing in channel competition and reveal how policymakers and consumers can strategically respond to BBP to improve their welfare.