Electronic Commerce and Competitive First-Degree Price Discrimination

As consumer e-commerce matures on-line retailers are adopting personalisation technologies which significantly increase their ability to undertake first-degree price discrimination by offering different prices to different consumers. We present a model of duoplolistic competition between firms capable of using such technologies. Using firstdegree price discrimination firms are able to extract more surplus from their customers, but also face more intense competition, because they compete, in effect, for each and every consumer in the market. Whether or not firms will choose to use this new technology will depend on whether or not the enhanced surplus extraction effect dominates the intensified competition effect. We present a model which makes these ideas precise, and characterise the conditions under which firms will choose to employ firstdegree price discrimination technologies. Acknowledgements We are grateful to John Beath and Avner Shaked for useful discussions. Both authors thank the financial support of the ESRC grant no. R000222642.