Profitability of behavior-based price discrimination

In this paper, we analyze the profitability of behavior-based price discrimination in a duopoly model with switching costs. We find that when firms price discriminate based on consumers’ preferences, and remain unaware of their switching costs, price discrimination boosts the equilibrium profits compared to uniform pricing, when the heterogeneity in the consumers’ preferences is not too large compared to that in the switching costs. This result qualitatively holds even in a two-period model with informed and forward-looking consumers.