Imperfect behavior-based price discrimination

In this article, we develop a model encompassing behavior-based discriminatory pricing as a limit case of a more general framework where firms have incomplete information about consumers’ purchase histories. We show that information accuracy has a non-monotonic impact on profits and the worst situation for firms is when information accuracy is intermediate. We also discuss welfare and consumer surplus implications of information accuracy. While welfare monotonically decreases with the level of information accuracy, there is an inverse U-shape relationship between consumers surplus and information accuracy.