Price Discrimination With Manipulable Observables

ABSTRACT

This article studies price discrimination by a seller who uses data on observables that buyers can control (or manipulate) at a cost. If the seller's discriminatory prices are offered covertly, equilibrium market segmentation is always coarse, resulting in limited price discrimination. In contrast, if prices must be transparently posted, every buyer pays a personalized price in equilibrium, though this does not always reduce buyer or social welfare. The analysis sheds new light on calls for transparency in how sellers utilize consumer data to customize prices and highlights potential issues with assessing welfare using (only) observed prices, pricing conduct, and market coverage.