Does Price Personalization Ethically Outperform Unitary Pricing? A Thought Experiment and a Simulation Study

Deni Mazrekaj*, Mark D. Verhagen, Ajay Kumar, Daniel Muzio

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Merchants often use personalized pricing: they charge different consumers different prices for the same product. We assess the ethicality of personalized pricing by generalizing and extending an earlier model by Coker and Izaret (Journal of Business Ethics 173:387–398, 2021) who found that price personalization ethically outperforms unitary pricing. Using a simulation analysis, we show that these results crucially depend on the choice of parameters and do not hold universally. We further incorporate additional sources of marginal cost into the utility function that will likely arise from personalized pricing. These include the expectation that personalized pricing is widely considered unfair by consumers who prefer that all consumers are charged the same price (unitary pricing), and that firms often approximate the consumers’ willingness-to-pay in ways that may raise negative sentiments among consumers who feel that their privacy is breached. By extending our model with disutility from unfairness perception and disutility from surveillance aversion, we demonstrate that personalized pricing is quickly outperformed by unitary pricing under social welfare functions that tend to prioritize total utility (utilitarianism and prioritarianism), whereas personalized pricing can ethically outperform unitary pricing under social welfare functions that tend to prioritize equality (egalitarianism and leximin). Our findings illustrate various intricacies and dynamics regarding the circumstances under which personalized pricing can be considered ethical.

Original languageEnglish
JournalJournal of Business Ethics
DOIs
Publication statusE-pub ahead of print - 4 Nov 2024

Keywords

  • Artificial intelligence
  • Personalized pricing
  • Price discrimination
  • Utility
  • Willingness-to-pay

Fingerprint

Dive into the research topics of 'Does Price Personalization Ethically Outperform Unitary Pricing? A Thought Experiment and a Simulation Study'. Together they form a unique fingerprint.

Cite this