with Y. Gu and C. Reggiani

CESifo Working Paper No. 7853. PDF Download

Abstract: The unprecedented access of firms to consumer level data not only facilitates more precisely targeted individual pricing but also alters firms’ strategic incentives. We show that exclusive access to a list of consumers can provide incentives for a firm to endogenously assume the price leader’s role, and so to strategically manipulate its rival’s price. Prices and profits are non-monotonic in the length of the consumer list. For an intermediate size, price leadership entails a semi-collusive outcome, characterized by supra-competitive prices and low consumer surplus. In contrast, for short or long lists of consumers, exclusive data availability intensifies market competition.

Non-technical summary

written for the CESifo Newsletter - November 2019 Featured Article

Key issue

Market leadership and exclusive access to data are observed in several industries. Several firms, such as tech giants, as well as brick and mortar companies (grocery shops, cafè chains), have collected, stored, and analyzed individual data for years. In the same vein, Amazon’s competitors are known to be adjusting their prices in response to online price changes, and so do supermarkets and other chains. We ask the following questions:

  • does exclusive access to customer-level data create incentives for market leadership?
  • are there anti- or pro-competitive effects from exclusive access to data?

Approach & methodology:

We present a game theoretic model of price competition with horizontal product differentiation in which one firm has access to exclusive customer data. Through data, which only covers a share of all consumers, the data holding firm can price discriminate the profiled consumers. The rest of the consumers remain anonymous to both firms. In our setting, the two firms independently and simultaneously decide on whether to announce its price “early” or “late”. If their choices coincide, then simultaneous competition follows. Otherwise, the firm that selects “early” announces its price first and acts as a price leader. Then, the other firm sets its price after observing the rival’s move.

Key findings and conclusions.

Exclusive data creates incentives for market leadership if a sufficient number of consumers are profiled. In particular, when an intermediate number of consumers is profiled, market leadership also entails a semi-collusive outcome in which market segmentation arises as an equilibrium feature. By acting as a price leader, the data-holder can set a very high posted price, which will then be undercut by the other firm. In equilibrium, the data holder only covers the market with profiled consumers who are price discriminated, whereas the rival firm only serves non-profiled consumers. This way, the data holder can distort market competition and lead to remarkably high prices.

However, when too many consumers are profiled, competition intensifies, and this leads to lower prices and substantial benefits to consumers. This paper contributes to the current literature on data-driven practices and the implications reveal that competition policy concerns arise on top of privacy ones.

The figure presents consumer surplus (left) and social welfare (right) in the different subgames, as a function of the number of profiled consumers. The solid line identifies the case in which the data holding firm leads the game, whereas the dashed line the case in which it follows. The dotted line identifies a simultaneous price competition.

Policy Lessons

  • Collecting and using data is not, per se, a source of competitive advantage which may entail an upward pressure on prices. It depends on the size of profiled consumers.
  • Solutions for when exclusive access to data entails anti-competitive effects: Mandatory data sharing can enforce more “symmetry” in the access to data and feeds competition.
  • Data gathering can have nuanced collusive implications not only via algorithms, but via firms’ asymmetric ability to price discriminate.