Behavior-based pricing under imperfectly informed consumers

•This paper constitutes a first assessment of the profit and consumer welfare effects of BBPD in markets with imperfectly informed consumers due to the firms advertising decisions.•Firms advertise less when price discrimination is permitted.•In comparison to no-discrimination, BBPD in our setting boosts industry profits and harm consumers. This finding challenges the “traditional” view that such pricing practices in oligopoly markets often intensify competition and potentially benefit consumers.•In comparison to the case with fully informed consumers, BBPD can increase industry profits at the expense of consumer welfare as long as advertising costs are not too low.•For competition policy our analysis suggests that it is important to taking into account different forms of market competition when evaluating the profit and consumer welfare effects of BBPD.

This paper is a first look at the dynamic effects of behavior-based price discrimination in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. We show that in comparison to no discrimination, firms reduce their advertising efforts, charge higher first period prices and lower second period prices. As a result of that in contrast to the profit and consumer welfare results obtained under full informed consumers, we show that behavior-based price discrimination boosts industry profits at the expense of consumer welfare.