Behaviour-Based Pricing for Competing Firms Facing Variety-Seeking Consumers

Many firms adopt behavioural-based pricing (BBP) whereby they charge past and new customers different prices whose valuations of products are affected by the variety-seeking behaviour, i.e., the tendency to seek diversity in brand or product choices. This behaviour is prevalent in practice but under-explored in the literature. To study BBP in markets with variety-seeking consumers, we build a two-period gaming model comprising two competing firms. We show that the consumer’s variety-seeking behaviour will only benefit the firm which adopts BBP. In particular, with BBP, the firms’ profits increase in the consumer’s variety-seeking degree. When the consumer’s variety-seeking degree is high, with BBP, the firms’ profits will be higher and consumer welfare will be lower than those without BBP. Counter-intuitively, if a firm unilaterally adopts BBP, its competitor will be better off if the consumer’s variety-seeking degree is high. In equilibrium, only one (resp. no, both) firm(s) will adopt BBP if the consumer’s variety-seeking degree is low (resp. intermediate, high). If the consumer’s variety-seeking degree is high, the firms’ profits when BBP is feasible (such that the firms can choose to adopt BBP or not) will be higher than those when BBP is infeasible (such that no firms can adopt BBP), where the firms’ gains from the feasibility of BBP increase in the consumer’s variety-seeking degree. Moreover, we find that with behavioural-based personalized pricing, i.e., when the firms can charge personalized prices to past customers, their profits increase in the consumer’s variety-seeking degree. With behavioural-based services, i.e., when the firms can offer additional services to past customers, as the consumer’s variety-seeking degree increases, the firms’ service levels decrease, and their profits first decrease and then increase. These findings uncover the different characteristics of BBP and help explain many real-world operations associated with BBP.