On the Choice of Uniform or Personalized Prices in the Digital Economy : Spatial Price Policy in Two-Sided Markets

2021

In this thesis, we examine firms’ choice of price policy, uniform or personalized prices, in

the digital economy. We focus on firms operating in the digital economy as the prevalence

of big data allows firms in this industry the opportunity to apply personalized pricing. We

survey relevant literature on product differentiation, two-sided markets and first-degree

price discrimination in spatial models. Further, we propose a Hotelling model of a twosided

market consisting of symmetric firms, consumers and advertisers. The firms choose

their pricing policies, invest in product quality and set the prices in the advertiser and

consumer market. To our knowledge, the model is the first of its kind to combine the

choice of price policy, the presence of a two-sided market and quality investments in the

same framework. We present two versions of the model, a one-sided duopoly model and

a two-sided duopoly model. In the one-sided model we find that the firms will always

choose to price discriminate as it constitutes a dominant strategy, complementing the

early literature on the field. In contrast, we show that in the two-sided model with an

adequately large advertiser market, the optimal price policy strategy is characterized by

a mixed strategy. Thus, the firms will not always choose to price discriminate with the

introduction of an advertiser market. For the firms, a large advertisement market drives

costly quality investments. This has implications on the choice of price policy as pricing

uniformly softens the competition in quality relative to personalized pricing.