The Preference for Quality and Optimal Fit Revelation Strategy
[ABSTRACT] While price discrimination is not allowed in many situations, information discrimination is allowed. A seller may wish to provide customized information based on each consumer’s personal data, collected by tracking cookies of the consumers’ websites, and purchase histories in membership accounts. Such a strategy is called targeting. In this paper, I examine the optimal targeting strategy and price decision by a monopolist in a market in which consumers have different vertical valuations. In doing so, I address the following two questions. First, does targeting work? Second, if it does work, what does it look like? My study represents two features of optimal signaling strategy, in a binary signaling setup. First, regardless of the consumer’s type, only the good signal receivers end up buying. Second, depending on consumer’s type, each consumer receives different type of signal, meaning that the seller strictly benefits from targeting. This strategy is realized in this manner. Consumers who have higher preference for quality get good signals more often, however, these good signals are less attractive compared to those for consumers with lower preference. This analysis can be extended to a dynamic framework in which the personal profile (purchase history) is endogenously designed by each consumer whose preference evolves over time. In this situation, strategic consumers may intentionally postpone their purchase, expecting for the better deals in the future. Then, the seller may give up targeting them at some point.