Firms in many industries obtain superior knowledge of customer preferences through industry experience or data analytics, whereas customers often need costly efforts to learn their match values. In this paper, we examine the situations under which a customer chooses whether to inspect upon observing her personalized price from a firm with superior knowledge. On the surface, it seems that the firm can use personalized prices to directly communicate the customers’ match value, and thus there is no need for customers to expend inspection efforts. However, we find that in equilibrium the firm may trick low-preference customers into overpaying more than their match value, even when the inspection cost is low. The opportunistic incentives induce customer suspicions, which may lead to excessive customer inspection that would be avoided if the firm were not capable of price discrimination. Therefore, personalized pricing cannot obviate customer inspection. Since inspection cost raises a deadweight loss in social welfare, public policies that prevent firms from price-discriminating against customers may benefit both firms and customers.

Prof. Xi LI
Innovation and Information Management
Marketing
Professor
Director, Asia Case Research Centre
Associate Director, Institute of Digital Economy and Innovation
3917 7271
KK 836
Publications
3Dec
3 Dec 2022
Marketing Science
24Nov
The reputation of HKU and the faculty’s strong connection with the Asian-Pacific business community can definitely help marketing scholars to conduct research more effectively, which in turn enables scholars to deliver update knowledge to students, and nurture high quality talents for the society.
24 Nov 2021
Marketing
24Nov
Born with a strong sense of curiosity, Dr. Xi Li is deeply interested in marketing strategies and economic phenomena. Impressed by the high quality of research and the rapid growth of HKU Business School, Dr. Li had officially joined us in July 2021 as an Associate Professor in Marketing.
24 Nov 2021
Marketing