Predatory Pricing with Personalized Pricing

We examine how the scope of predatory pricing changes with the availability of personalized pricing. To this end, we consider a simple model based on a deep-pocket theory of predation in which duopoly firms compete in a horizontally differentiated market. More specifically, we consider a scenario in which two firms compete across two periods with different amounts of assets. Each firm goes bankrupt if it suffers a loss and does not have enough assets to cover the loss. If not, the firm can continue production in the second period. Due to the asymmetry in asset size, the firm with more assets may have an incentive to use predatory pricing to secure a monopoly position in the second period, even at the expense of profits in the first period. When analyzing this model, we consider the following price combination policies: (i) in which both firms use uniform pricing; (ii) in which a dominant firm uses personalized pricing whereas its rival uses uniform pricing; and (iii) in which both firms use personalized pricing. We show that it is easiest for the dominant firm to use predatory pricing in case (ii). The scope for predatory pricing by the dominant firm may increase or decrease in one of the two remaining cases relative to the other. More specifically, it is more difficult for the dominant firm to use predatory pricing when the marginal cost of production is relatively low in case (iii) compared to case (i), and vice versa if the marginal cost is relatively high. Holding parameter values equal across cases (i), (ii), and (iii), we also discuss differences in equilibrium outcomes: each firm's profits, consumer surplus, and social welfare. The key factors that drive the aforementioned differences are the market structures (whether the market structure is either a monopoly by firm A or a duopoly) and the degree of competition resulting from differences in the combination of pricing policies.