Consumer Flexibility, Data Quality and Targeted Pricing

Transcription

1 No 117 Consumer Flexibiliy, Daa Qualiy and Targeed Pricing Geza Sapi, Irina Suleymanova November 2013

2 IMPRINT DICE DISCUSSION PAPER Published by düsseldorf universiy press (dup) on behalf of Heinrich Heine Universiä Düsseldorf, Faculy of Economics, Düsseldorf Insiue for Compeiion Economics (DICE), Universiässraße 1, Düsseldorf, Germany Edior: Prof. Dr. Hans Theo Normann Düsseldorf Insiue for Compeiion Economics (DICE) Phone: +49(0) , e mail: normann@dice.hhu.de DICE DISCUSSION PAPER All righs reserved. Düsseldorf, Germany, 2013 ISSN (online) ISN The working papers published in he Series consiue work in progress circulaed o simulae discussion and criical commens. Views expressed represen exclusively he auhors own opinions and do no necessarily reflec hose of he edior.

3 Consumer Flexibiliy, Daa Qualiy and Targeed Pricing Geza Sapi y Irina Suleymanova z November 2013 Absrac We invesigae how rms incenives o acquire cusomer daa for argeed o ers depend on is qualiy. A wo-dimensional Hoelling model is proposed where consumers are heerogeneous boh wih respec o heir locaions and ransporaion cos parameers ( exibiliy). Firms have perfec daa on he locaions of consumers while daa on heir exibiliy is imperfec. When consumers are relaively homogeneous in heir exibiliy, in equilibrium boh rms acquire cusomer daa regardless of is qualiy. This increases pro s bu harms consumers. When consumers are relaively di ereniaed in exibiliy, daa acquisiion incenives depend on is qualiy. Only if he daa is su cienly precise, boh rms acquire i and heir pro s decrease, while consumers are beer-o. Our model has paricular relevance for locaion-based markeing such as in mobile elephony, where rms have near-perfec informaion on he proximiy of cusomers bu may have imperfec knowledge of oher consumer characerisics. JEL-Classi caion: D43; L13; L15; O30. Keywords: Price Discriminaion, Cusomer Daa, Marke Segmenaion. We hank he paricipans of he research seminar a he Düsseldorf Insiue for Compeiion Economics (2013, Düsseldorf), The Twelfh Workshop on he Economics of Informaion Securiy (2013, Georgeown Universiy, Washingon, D.C.) and The Forieh Annual Conference of EARIE (2013, Evora) for very valuable commens. y European Commission DG COMP - Chief Economis Team and Düsseldorf Insiue for Compeiion Economics (DICE), Heinrich Heine Universiy of Düsseldorf. sapi@dice.uni-duesseldorf.de. The views expressed in his aricle are solely hose of he auhors and may no, under any circumsances, be regarded as represening an o cial posiion of he European Commission. z Corresponding Auhor: Düsseldorf Insiue for Compeiion Economics (DICE), Heinrich Heine Universiy of Düsseldorf. suleymanova@dice.hhu.de. 1

4 1 Inroducion The widespread use of smarphones wih buil-in GPS chips is responsible for a boom of locaionbased markeing where argeed adverisemens and o ers o consumers are relaed o heir precise geographic posiion (see, for insance, eard, 2011). Several mobile phone applicaions (such as Coupons and Mobiqpons) rely on he GPS devices o ransmi real-ime informaion on he physical locaion of a consumer and allow reailers o cusom-arge rebaes respecively (see Worham, 2009). However, locaion daa is nowadays by far no he only ype of cusomer informaion used in mobile markeing. Huge cusomer daabases colleced by mobile nework operaors provide an addiional opporuniy for argeed pricing and adverising. In he recen years mobile rms sared selling his daa o markeing rms, adverisers or oher ineresed paries, raising concerns of privacy advocaes (see, for insance, Tene and Polonesky, 2012, and Tode, 2013a). For example, since 2012 Verizon Wireless, he larges nework operaor in he U.S., sells daa on locaion, demographics (age, gender) and consumpion habis of is cusomers (Panzarino, 2012). In 2013, AT&T, he American elecommunicaions gian, also announced is plans o sell daa i obained on is cusomers smarphone usage (see Fichard, 2013). 1 The abiliy of rms o conver heir knowledge abou cusomers ino aracive o ers depends crucially on daa qualiy. I appears ha in mobile markeing ineresed reailers can have near perfec informaion on cusomer locaions. The acquisiion of addiional cusomer daa allows rms o conclude on oher dimensions of consumer preferences relevan in spaial compeiion, such as consumer exibiliy. 2 Daa on consumer exibiliy is mos likely o be imperfec. We consider a model of spaial compeiion à la Hoelling and focus on rms incenives o acquire 1 In some cases mobile operaors do no direcly sell cusomer daa, hey insead use i o design argeed o ers on behalf of ineresed adverisers. For insance, in 2013 he hree UK s larges mobile nework operaors, Vodafone UK, Telefonica UK (O2) and EE, organized a join venure Weve where hey pooled heir daa on millions of cusomers (see Hawkes, 2013). Weve s produc WeLocae provides an opporuniy for ineresed rms o adverise and send special o ers depending on boh a consumer s locaion and demographics. The same year arclaycard, a global paymen business, launched for UK cusomers bespoke o ers, where consumers can search for personalized o ers (based on cusomer daa such as spending hisory and demographics) on a wide range of producs assessable boh online and on mobile devices (see Winch, 2013). This allows consumers o search for he neares savings suggesions based on heir locaion. 2 For example, Facual, a mobile markeing rm, recenly launched Geopulse Audience, a daa plaform ha allows adverisers o deliver personalized o ers o consumers based no only on heir locaions, bu also on heir income, which is esimaed based on heir geo-behavioral paerns (see hp:// A user s income can serve as a good proxy for her exibiliy o swich beween compeing adverisers. Sense Neworks is anoher mobile adverising company, which allows consumer argeing based on locaion and behavioral daa. Informaion is available on age, income, educaion and ehniciy, all reasonable signals on consumer exibiliy (see hps:// 2

5 cusomer exibiliy daa (on consumer ransporaion cos parameers) for argeed o ers depending on is qualiy. 3,4 We show ha here is a suble relaionship beween cusomer daa qualiy, heerogeneiy of consumers and rms pro s. 5 Our aricle conribues o he srand of lieraure on compeiive price discriminaion wih demand-side asymmeries. In ha case consumers can be classi ed ino di eren groups depending on heir preferences for a paricular rm. The quesion mos ofen analyzed in ha srand resolves around how rms abiliy o discriminae based on consumer locaions (brand preferences) in uences prices and rms pro s. Thisse and Vives (19) were he rs o show ha rms end up in a prisoner s dilemma such ha every rm has a unilaeral incenive o discriminae, while boh rms are worse-o compared o he no-discriminaion case. 6 In conras o mos aricles in his srand we allow consumers o di er no only in heir locaions, bu also in exibiliy. In paricular, we follow Jenzsch, Sapi and Suleymanova (2013) and consider an augmened version of he Hoelling model wih consumer heerogeneiy along wo dimensions: locaions and ransporaion cos parameers. 7 While rms have perfec knowledge 3 The erm exibiliy capures he inuiion ha depending on wheher ransporaion coss are high or low, consumers are less or more likely o buy from he farher rm, respecively. Consumers wih high (low) ransporaion coss can be referred o as less (more) exible. 4 Geo-conquesing is becoming an exremely popular sraegy in mobile markeing, where a rm arges prospecive cusomers when hey are close o he compeior s locaion (see, for insance, Tode, 2013b). In ha case while designing is argeed o ers a rm akes ino accoun no only he disance of prospecive consumers o is own locaion, bu also o ha of he rival, which calls for he analysis of rms argeing aciviies in a model of spaial compeiion. 5 Our analysis is also relevan for radiional coupon markeing, where rms may infer he disance o he shops based on consumers physical addresses, which are easy o ge even from public sources. On he op of address daa rms can acquire addiional daa on consumer preferences. For example, in Germany Deusche Pos sells household-level daa on demographics, living siuaion, purchasing power and several oher dimensions, which reveals much abou consumer exibiliy (see Deusche Pos, Adverising by mail, Local Promoion a hp:// 6 A similar conribuion is made in Sha er and Zhang (1995) and eser and Perakis (1996). Oher papers show ha rms abiliy o discriminae based on consumer locaions does no necessarily lead o a prisoner s dilemma. For example, in Sha er and Zhang (2000) rms may bene from he abiliy o discriminae among he wo consumer groups loyal o each of he rms if hese groups are su cienly heerogeneous in he srengh of heir loyaly. Chen, Narasimhan and Zhang (2001) show ha when he argeing abiliy of one or boh rms improves, bu remains imperfec, rms pro s may increase. In Sha er and Zhang (2002) a rm wih a sronger brand loyaly may bene from rms abiliy o discriminae among individual consumers based on he srengh of brand loyaly. 7 orensein (195) also considers a model where consumer preferences are heerogeneous along di eren dimensions. His simulaion resuls show ha price discriminaion based on ransporaion cos parameers is pro able. We provide analyical resuls, which suppor his conclusion and specify ha consumers should be relaively homogeneous in exibiliy. Armsrong (2006) shows ha rms bene from he abiliy o discriminae beween he wo consumer groups wih high and low ransporaion coss boh of which are heerogeneous in brand preferences. We show ha his resul does no hold when consumers are relaively di ereniaed in exibiliy and rms have perfec daa on consumer locaions. Also, we allow rms o idenify more han wo exibiliy segmens depending on daa qualiy. Liu and Shuai (2013) also consider a model wih wo-dimensional consumer heerogeneiy. 3

6 of consumer locaions, hey may acquire daa on consumer exibiliy of he exogenously given qualiy, which allows o discriminae along ha dimension oo. We show ha he pro e ec of rms abiliy o discriminae based on consumer exibiliy is driven by he ype of he equilibrium sraegy rms use on heir urfs in he absence of exibiliy daa and he resuling balance beween he compeiion and ren-exracion e ecs following daa acquisiion. When consumers are relaively homogeneous (di ereniaed) in exibiliy, every rm follows a monopolizaion (marke-sharing) sraegy on is urf. The pro e ec of he abiliy o discriminae based on consumer exibiliy is posiive (negaive) in he former (laer) case. As a resul, if consumers are relaively homogeneous, in equilibrium boh rms acquire exibiliy daa, regardless of is qualiy. Daa acquisiion does no lead o welfare improvemen and akes place solely a he expense of consumers. If, in conras, consumers are relaively di ereniaed, boh rms acquire exibiliy daa in equilibrium only if is qualiy is su cienly high. eer daa, however, drives rms ino a prisoner s dilemma, making hem worse-o while social welfare and consumer surplus increase. The aricle mos closely relaed o ours is Liu and Serfes (2004), who develop a locaion model of oligopolisic hird-degree price discriminaion o sudy he incenives of rms o acquire daa on consumer locaions (brand preferences) depending on is qualiy. We exend he analysis of Liu and Serfes by adding anoher dimension of consumer heerogeneiy, exibiliy, and allow rms o ge daa on i. We believe ha in realiy price discriminaion along he exibiliy dimension plays an imporan role. Our modelling approach allows us o obain new resuls on rms incenives o acquire cusomer daa compared o Liu and Serfes. In Secion 4 we provide a deailed comparison wih Liu and Serfes. Our aricle is also relaed o Cors (199) who shows ha bes-response asymmery is a necessary condiion for hird-degree price discriminaion o have an unambiguous e ec on equilibrium prices and pro s. Cors, however, does no furher specify under which condiions equilibrium prices and pro s would decrease and when hey would increase. In our model rms bes-response funcions are characerized by bes-response asymmery, such ha for a given locaion on a rm s urf ha rm considers consumers wih relaively high ransporaion coss o be is srong marke, while he srong marke of he rival are consumers wih relaively low ransporaion coss. Our resuls show ha when consumers are relaively homogeneous, However, in heir analysis he srengh of consumer preferences is same among all consumers. 4

7 wih he abiliy o discriminae based on consumer exibiliy equilibrium prices (weakly) increase and rms pro s ge larger. In conras, when consumers are relaively di ereniaed, he abiliy o discriminae based on consumer exibiliy resuls in lower equilibrium prices and lower pro s. Our analysis exends Cors resuls by specifying condiions under which bes-response asymmery yields lower or higher equilibrium prices and pro s when rms can discriminae based on consumer exibiliy. A furher aricle close o ours is Jenzsch, Sapi and Suleymanova (2013). The auhors show ha compeiors incenives o share cusomer daa among each oher depend on is ype and on how srongly consumers are heerogeneous in exibiliy. We exend his work by showing ha consumer heerogeneiy in exibiliy is also crucial for rms incenives o acquire cusomer daa. Also, in our curren analysis cusomer exibiliy daa can be imperfec, while i is always perfec in Jenzsch, Sapi and Suleymanova. Our paper is organized as follows. In Secion 2 we presen he model. In Secion 3 we sae he resuls of he equilibrium analysis. Precisely, we derive rms equilibrium incenives o acquire cusomer exibiliy daa depending on is qualiy and consumer heerogeneiy in exibiliy. In Secion 4 we compare our resuls wih he closes aricle, Liu and Serfes (2004). Finally, in Secion 5 we conclude. 2 The Model There are wo rms, A and, producing wo brands of he same produc a zero marginal cos and compeing in prices. Firms are siuaed a he wo ends of a Hoelling line of uni lengh wih rm A being locaed a x A = 0 and rm a x = 1. There is a uni mass of consumers, each of whom is characerized by an address x 2 [0; 1], which corresponds o her preference for he ideal produc. If a consumer does no buy her ideal produc she incurs linear ransporaion coss proporional o he disance o he rm. We follow Jenzsch, Sapi and Suleymanova (2013) and assume ha addiionally o heir addresses consumers are also di ereniaed in ransporaion coss per uni disance, 2 ;, where > 0. Each consumer is uniquely characerized by a pair (x; ). In he following we say ha consumers wih addresses x < 1=2 (x > 1=2) belong o he urf of rm A (). We consider wo versions of our model, depending on he level of consumer heerogeneiy in exibiliy measured by he raio of he larges o he lowes ransporaion cos parameers, 5

8 l := =. In he rs version = 0, such ha lim!0 l = 1. We say ha in his case consumers are relaively di ereniaed in exibiliy. In he second version > 0 and l 2 and consumers are relaively homogeneous in exibiliy. The wo versions of our model represen wo exreme cases regarding consumer heerogeneiy in exibiliy. We assume ha rms have perfec informaion on consumer addresses and can acquire daa on consumer exibiliy which is imperfec. In paricular, we assume ha rms can acquire an exernal daase conaining he exibiliy characerisics of consumers in he marke. If rms acquire his daase, hey can idenify he ransporaion cos parameers of individual consumers, or of consumer groups, depending on he qualiy of daa. In paricular, he qualiy of daa on consumer exibiliy is measured by he parameer k = 0; 1; 2; ::; 1. For a given k rms can divide he inerval 2 ; ino 2 k segmens and idenify every consumer as belonging o one of hose segmens. Segmen m = 1; 2; :::; 2 k consiss of consumers wih he ransporaion cos parameers 2 m (k); m (k), where m (k) = + ( )(m 1)=2 k and m (k) = + ( )m=2 k denoe he mos and he leas exible consumers on segmen m, respecively. For any m we can compue he raio of he larges o he lowes ransporaion cos parameers on ha segmen, l m (k) := m (k)= m (k). We say ha consumers are relaively di ereniaed in exibiliy on segmen m if m (k) = 0, such ha lim m (k)!0 l m (k) = 1. Similarly, consumers are relaively homogeneous in exibiliy on segmen m if m (k) > 0 and l m (k) 2. Noe ha segmen m = 1 always conains he mos exible consumer (wih = ). When k! 1, rms have perfec daa on he addresses and exibiliy of all consumers in he marke and, hence, can charge individual prices. In all oher cases rms have o charge he same price o consumers belonging o one segmen and having he same address. We denoe he price of rm i o consumers wih address x on segmen m when cusomer daa is of qualiy k as p im (x; k). The uiliy of a consumer (x; ) from buying a rm i = fa; g is U i (p im (x; k); ; x) = jx x i j p im (x; k). (1) In equaion (1) > 0 denoes he basic uiliy, which is high enough such ha he marke is In he markeing science lieraure i is sandard o model consumer heerogeneiy along wo dimensions: brand preferences and responsiveness o markeing variables, such as price and adverising. For example, based on a sample of weekly sore-level daa for kechup, esanko, Dubé and Gupa (2003) idenify hree exibiliy segmens characerized by di eren price elasiciies: price-insensiive, moderaely price-sensiive and very pricesensiive shoppers. 6

9 always covered in equilibrium. A consumer buys from a rm proposing he higher uiliy. We follow Thisse and Vives (19) and assume ha if a consumer is indi eren, she buys from he closer rm. If x = 1=2, hen in he case of indi erence a consumer buys from rm A. The game unfolds as follows. Sage 1 (Cusomer daa acquisiion). Firms observe he exogenously given qualiy of cusomer exibiliy daa, k, and decide independenly from each oher wheher o acquire his daa. Sage 2 (Compeiion). Firs, rms independenly and simulaneously choose regular prices for each address x. Subsequenly he rm(s) wih cusomer exibiliy daa issues (issue) discouns o consumers in di eren exibiliy segmens. The iming of he compeiion sage is consisen wih a large body of lieraure on compeiive price discriminaion where rms make heir argeed o ers afer seing regular prices (e.g., Thisse and Vives, 19; Sha er and Zhang, 1995, 2002; Liu and Serfes, 2004, 2005). 9 I re ecs he observaion ha discouns issued o ner consumer groups can be changed easier han prices argeed a broader consumer groups. 10 Moreover, if rms decide simulaneously on regular prices and discouns, Nash equilibrium in pure sraegies does no always exis. 3 Equilibrium Analysis We solve he game backwards and sar wih he compeiion sage where rms choose prices aking heir decisions in he daa acquisiion sage as given. Two subgames can emerge in he second sage. In he symmeric subgame boh rms hold cusomer exibiliy daa. 11 In he asymmeric subgame only one rm holds daa on consumer exibiliy. We derive he equilibrium in each subgame and compare pro s in di eren subgames o conclude abou rms incenives o acquire cusomer exibiliy daa in he rs sage. We denoe he equilibrium pro of rm i = A; as A;A i given by k. (k) ( A;NA (k)) in he symmeric (asymmeric) subgame when daa qualiy is i 9 Noe ha he iming in Sage 2 is equivalen o he following: i) in he subgame where boh rms hold exibiliy daa, rms choose all he prices simulaneously, and ii) in he subgames where only one rm holds exibiliy daa, he rm wihou daa chooses is prices rs, and he oher rm follows. 10 We observe in many markes ha regular prices change less frequenly han coupon discouns. For example, (rerieved on January 26, 2013) menions ha Pizza Hu discoun coupons end o change ofen. 11 If k = 0, his subgame is equivalen o neiher of he rms holding cusomer exibiliy daa. 7

10 3.1 Symmeric subgame: oh rms hold daa on consumer exibiliy When boh rms hold daa on consumer exibiliy, hey can idenify each consumer as belonging o one of he exibiliy segmens and can charge di eren prices o di eren segmens. As rms are symmeric, we only focus on he urf of rm A. Consider an address x < 1=2 on he urf of rm A and an arbirary segmen m. Under prices p Am (x; k) and p m (x; k) he ransporaion cos parameer of he consumer indi eren beween buying from rms A and is e m (x; k) = p Am(x; k) p m (x; k), provided e m (x; k) 2 m (k); m (k). 1 2x On segmen m rm A serves consumers wih high ransporaion cos parameers; i.e., hose wih e m (x; k). Firm a he same ime aracs consumers wih low ransporaion cos parameers ( < e m (x; k)) Then for any address x and any segmen m under daa qualiy k rm A maximizes he expeced pro E [ Am (x; k)jx < 1=2] = p Am (x; k) Pr e m (x; k) by choosing he price funcion p Am (x; k). Firm maximizes he expeced pro E [ m (x; k)jx < 1=2] = p m (x; k) Pr < e m (x; k) by choosing he price funcion p m (x; k). The following proposiion saes equilibrium prices and pro s depending on he qualiy of cusomer exibiliy daa. Proposiion 1. (Symmeric subgame.) Assume ha boh rms hold cusomer exibiliy daa of qualiy k. Equilibrium prices, demand regions and pro s depend on daa qualiy and consumer heerogeneiy in exibiliy as given in Table 1. Proof. See Appendix. As we see from Table 1, in he symmeric subgame he equilibrium on he segmen m = 1 depends on consumer heerogeneiy in exibiliy. If consumers are relaively homogeneous, rm A arges on is urf he mos exible consumers on m = 1 (wih =) and serves all consumers here alhough he rival charges he price of zero. If consumers are relaively di ereniaed, rm A arges he less exible consumers on m = 1 on is urf, and he more exible consumers

11 Table 1: subgame. Equilibrium prices, demand regions on rm i s urf and pro s in he symmeric C onsum er heerogeneiy in exibiliy R elaively m = 1: 2j1 2xj di ereniaed () 32 k m 2: m (k) j1 R elaively p im (x; k) p jm (x; k) served C onsum ers 2xj m = 1: m 2: 0 j1 2xj 32 k by rm i hom ogeneous () m (k) j1 2xj 0 All () = 0; () > 0 and l 2 A;A A = A;A h k k k l+1 i l k swich o he rival, which charges posiive prices on rm A s urf. On he segmens m 2 in boh versions of our model we ge he same equilibria, similar o hose wih m = 1 in he case of relaively homogeneous consumers. To undersand hose di erences, we should rs noe ha in he version wih relaively homogeneous consumers under any daa qualiy consumers remain relaively homogeneous on any segmen. Indeed, l m (k) 2 holds for any k 0 and any m 1. However, in he version wih relaively di ereniaed consumers, consumers remain relaively di ereniaed only on he segmen m = 1, while on all oher segmens hey become relaively homogeneous. Indeed, for any k 1 and any m 2 we have l m (k) 2, while for any k 0 we have lim m (k)!0 l m (k) = 1 when m = 1. We will nex show ha depending on consumer heerogeneiy on a given segmen a rm follows a marke-sharing or a monopolizaion sraegy on is urf, which in urn deermines he equilibrium. Equilibrium sraegies: monopolizaion or marke-sharing. The di erence in equilibria depending on consumer heerogeneiy is driven by he ype of he bes-response funcion a rm follows on is urf. On any address on heir urfs, rms follow he monopolizaion sraegy on segmens wih relaively homogeneous consumers. In conras, on segmens on heir urfs wih relaively di ereniaed consumers, rms resor o he marke-sharing sraegy. To demonsrae his, we consider he urf of rm A. Consider rs an arbirary segmen m wih relaively homogeneous consumers, where l m (k) 2 holds. The bes-response funcion of rm A on segmen m on some address x < 1=2 akes he form: p Am (x; k; p m j x < 1=2) = p m + m (k)(1 2x) for any p m. (2) 9

12 As Expression (2) shows, for any price of he rival, rm A opimally charges a relaively low price argeed a he mos exible consumer on segmen m (wih = m (k)) o serve here all consumers. We say ha rm A follows a monopolizaion sraegy. Wih homogeneous consumers i su ces for rm A o slighly reduce he price argeed a he leas exible consumers o ge all consumers on segmen m wih a given address. Alhough in equilibrium rm has o charge he price of zero, i does no serve any consumers on a segmen wih relaively homogeneous consumers. Consider now some segmen m wih relaively di ereniaed consumers, where lim m (k)!0 l m (k) = 1 holds. address x < 1=2 akes he form: The bes-response funcion of rm A on segmen m on some < p m if p m m (k)(1 2x) p Am (x; k; p m j x < 1=2) = : pm + m (k)(1 2x) =2 if p m < m (k)(1 2x). (3) As he mos exible consumer on segmen m can swich brands coslessly ( m (k) = 0), in order for rm A o arac all consumers on segmen m wih a given address i has o charge a price ha is a leas as low as ha of he rival. As he bes-response funcion (3) shows, i is opimal for rm A o monopolize segmen m for a given address only if he rival s price is su cienly high, wih p m m (k)(1 2x). Oherwise, rm A prefers o le he rival gain he more exible consumers on segmen m. We say ha rm A follows a marke-sharing sraegy: Firm A is ready o share segmen m wih he rival when serving all consumers is oo cosly, which is he case if he rival charges a relaively low price. In equilibrium boh rms charge posiive prices on segmen m on address x < 1=2. The less preferred rm charges a relaively low price in order o arac consumers, which makes i unpro able for rm A o monopolize segmen m for any address on is own urf. As a resul, for all addresses on is own urf rm A serves only he less exible consumers on segmen m while rm aracs he more exible ones. Ren-exracion and compeiion e ecs. When k = 0, rms are no able o discriminae based on consumer exibiliy. Wih relaively homogeneous consumers a rm follows a monopolizaion sraegy on any address on is urf. In equilibrium every rm serves all consumers on is urf. Wih relaively di ereniaed consumers a rm follows a marke-sharing sraegy on any address on is urf. In equilibrium every rm serves only he less exible consumers on is urf. Figure 1 shows equilibrium demand regions in boh versions of our model for k = 0. How does 10

13 Figure 1: Equilibrium demand regions for k = 0. We used he values = 1 ( = 3=4) and = 0 ( = 1=2) in he case of relaively di ereniaed (homogenous) consumers. he equilibrium change when he qualiy of cusomer exibiliy daa improves and akes values k 1? In lieraure on compeiive price discriminaion one usually disinguishes beween wo e ecs. Daa of beer qualiy allows rms o poenially exrac more rens from consumers. To his we refer as he ren-exracion e ec. Daa qualiy may also change he inensiy of compeiion beween he rms, o which we refer as compeiion e ec. Consider rs he case wih relaively homogeneous consumers. As we menioned above, for any daa qualiy consumers remain relaively homogeneous on every segmen such ha rms always resor o he monopolizaion sraegy on any segmen on heir urfs. In equilibrium each rm arges he mos exible consumer on a given segmen for any address on is own urf while he rival is forced o charge he price o zero. Then under any daa qualiy each rm serves all consumers on is own urf. Figure 2 shows equilibrium demand regions in boh versions of our model for k = 1. Improvemens in cusomer daa qualiy resul in a siuaion, in which every consumer is charged a (weakly) higher price. This is because each consumer is now allocaed o a segmen in which he mos exible consumer is (weakly) less exible han before. As a resul rms pro s unambiguously increase. Higher qualiy daa improves he abiliy of rms o exrac rens from heir loyal consumers, while compeiion e ec is absen as he rival always charges he price of zero on a rm s urf. Figure 3 depics a rm s equilibrium pro as a funcion of cusomer daa qualiy in he symmeric subgame in he wo versions of our model. For he example we used he values = 1 ( = 0) and = 2 ( = 1) in he case of relaively homogeneous 11

14 (di ereniaed) consumers. Consider now he case wih relaively di ereniaed consumers. As we showed above, for any qualiy of cusomer daa, consumers remain relaively di ereniaed only on he segmen m = 1, while on all oher segmens hey become relaively homogeneous. If k = 0, rms pursue a marke-sharing sraegy on heir urfs. However, as k increases by one sep, on he segmen m = 2 rms swich o he monopolizaion sraegy while on he segmen m = 1 hey mainain he marke-sharing sraegy. As a resul, on boh segmens on any address on is urf rm A charges lower prices compared o he uniform price a k = 0. The reason is ha on he segmen m = 1 consumers become on average more exible, and on he segmen m = 2 rm responds aggressively o rm A s monopolizaion sraegy and decreases is price o zero. Lower prices on a rm s urf resul in lower equilibrium pro s. However, when k increases furher, pro s sar o increase. To undersand his resul consider some k 1. On (all) he segmen(s) m 2, where consumers are relaively homogeneous, a rm s pro s on is urf increase when k ges larger by one sep, along he logic explained earlier for he case of relaively homogeneous consumers. On he segmen m = 1, where consumers are relaively di ereniaed, a rm s pro s decrease due o he logic described above for he case k = 0. As he segmen m = 1 comprises (weakly) less han half of all consumers on a rm s urf for any k 1, he negaive pro e ec on ha segmen is ouweighed by he posiive pro e ec on all he oher segmen(s), such ha a rm s pro s on is urf increase. For he same reason, wih an increase in k each rm serves more consumers on is urf as for any k 1 rms lose consumers on heir urfs only on he segmen m = 1 (compare Figures 1 and 2). We can summarize our resuls as follows. When consumers are relaively homogeneous, each rm follows a monopolizaion sraegy on is urf, such ha he rival charges he price of zero here and compeiion is very inense. The improvemen in daa qualiy resuls hen only in a posiive ren-exracion e ec, while compeiion canno be inensi ed as he rival canno go below he price of zero. When consumers are relaively di ereniaed, each rm follows a marke-sharing sraegy on is urf, where he rival charges posiive prices and compeiion is no very inense. The improvemen in daa qualiy from k = 0 o k = 1 resuls in a negaive compeiion e ec, such ha pro s decrease. Wih a furher improvemen in daa qualiy, he ren-exracion e ec sars o dominae, and pro s increase. 12

15 Figure 2: Equilibrium demand regions for k = 1. We used he values = 1 ( = 3=4) and = 0 ( = 1=2) in he case of relaively di ereniaed (homogenous) consumers. Profi 0.4 Relaively homogenous consumers Relaively differeniaed consumers k Figure 3: Individual pro s and he qualiy of cusomer exibiliy daa (symmeric subgame). We used he values = 1 ( = 0) and = 2 ( = 1) in he case of relaively homogeneous (di ereniaed) consumers. 13

16 3.2 Asymmeric subgame: Only one rm holds daa on consumer exibiliy We assume wihou loss of generaliy ha rm A acquires cusomer exibiliy daa while rm remains wihou. The laer mus o er he same price o all consumers wih a given address irrespecively of heir exibiliy. In conras, rm A can price-discriminae based on boh consumer addresses and exibiliy. The following proposiion summarizes our resuls for he case of relaively homogeneous consumers. Proposiion 2. (Asymmeric subgame wih relaively homogenous consumers.) Assume ha consumers are relaively homogeneous in exibiliy and only rm A holds daa on consumer exibiliy. Equilibrium prices, demand regions and pro s are as given in Table 2. Proof. See Appendix. For he inuiion behind he equilibrium, consider rs he urf of rm A. For any daa qualiy consumers remain relaively homogeneous on any exibiliy segmen, where rm A adops a monopolizaion sraegy. Firm canno do beer han charging a zero price on any address for any daa qualiy, herefore rm A does no face a negaive compeiion e ec when daa qualiy improves. In he laer case every consumer is allocaed o a segmen in which he mos exible consumer is now (weakly) less exible han before. As a resul he pro s of rm A on is own urf increase wih daa qualiy improvemen due o a posiive ren-exracion e ec. Firm does no earn any pro s here. Consider now he urf of rm. Di eren from he symmeric subgame where in equilibrium each rm serves all consumers on is urf, in he asymmeric subgame he rm wihou exibiliy daa loses some consumers on is urf if consumers are weakly homogeneous; i.e., l > 3=2. To undersand his resul, assume ha rm arges he mos exible consumers on is urf and charges p (x; k) = (2x 1) for any x > 1=2. Does rm have an incenive o increase prices and lose some of he more exible consumers (on he segmen m = 1)? Compared o he symmeric subgame, rm loses less consumers in case of a price increase because rm A responds wih a higher price on he segmen m = 1. Di eren from he symmeric subgame, his makes i pro able for rm o charge a price above p (x; k) = (2x 1) and lose some consumers on he segmen m = 1, provided consumers are weakly homogeneous (l > 3=2). How does he equilibrium change wih he improvemen in daa qualiy? If consumers are srongly homogeneous; i.e, l 3=2, irrespecively of daa qualiy rm arges he mos exible consumer on any address. This leaves no scope for rm A o arac away any of is 14

17 Table 2: Equilibrium prices, demand regions and pro s in he asymmeric subgame. The case of relaively homogenous consumers. l 3 2 and k 0 ( h i (l 1)(m 1) p Am (x; k) = 1+ (1 2x) if x 1 2 k 2 0 if x > 1 2 Consumers served by rm A: x 1 2 A;NA A (k) = (1+l) p Am >< (x; k) = >: (l 1) 2 k+3 A;NA (k) = < l 2 and 0 k < log 2 p (x; k) = 0 if x 1 2 (2x 1) if x > 1 2 h 2(l i 1) 2l 3 h i (l 1)(m 1) 1 + (1 2x) if x 1 2 k 2 (2l 3)(2x 1) 4 if x > 1 2 & m = 1 0 if x > 1 2 & m > 1 p (x; k) = 0 if x 1 2 (2l 1)(2x 1) 2 " if x > 1 2 x 1 2 Consumers served by rm A: x > 1 2 & 2+ 4 A;NA A (k) = (12l2 12l+1) 64(l 1) p Am >< (x; k) = >: (l 1) A;NA 2 k+3 (k) = (2l 1)2 32(l 1) 3 2 < l 2 and k log 2 h 2(l i 1) 2l 3 h i (l 1)(m 1) 1+ (1 2x) if x 1 2 k 2 (l 1)(2x 1) if x > 1 2 k+1 2 & m = 1 0 if x > 1 2 & m > 1 0 if x p 1 (x; k) = 2 1+ l 1 2 (2x 1) if x > 1 k 2 Consumers served by rm A: A;NA 1+l A (k) = " x 1 2 x > 1 2 (l 1)(2 k+1 1) 2 2k+4 & +( ) 2 k+1 A;NA (k) = 1+ l 1 2 k k

18 loyal consumers, even wih perfec cusomer daa. Then boh rms pro s on rm s urf do no change wih he improvemen in daa qualiy. Consider now he case wih weakly homogeneous consumers (l > 3=2). If daa qualiy is low (k < log 2 [(l 1) =(l 3=2)]), rm A has a limied abiliy o arac consumers on he urf of rm. In ha case rm does no have o reduce is prices wih daa qualiy improvemen o keep consumers on he segmens m 2. Then rms pro s on he urf of rm do no depend on k. However, when k increases above k = log 2 [(l 1) =(l 3=2)], he improved abiliy of rm A o arge consumers forces rm o reduce is prices o avoid losing consumers on he segmens m 2. Alhough due o a decrease in rm s equilibrium prices i gains consumers on is own urf, is pro s here decrease. The pro s of rm A on he urf of rm decrease as well as i has o reduce is prices on any address on he segmen m = 1, while is marke share ges also smaller. As he pro s of rm A on he rival s urf consiue only a small share of is oal pro s, he laer undoubedly increase wih he improvemen in daa qualiy. Profi 0.27 Firm A Profi Firm A 0.26 Firm 0.30 Firm Figure 4a: l 3=2 wih = 1, = 1:2 k Figure 4b: 3=2 < l 2 wih = 1, = 1:75 k Figures 4a-4b: Individual pro s and he qualiy of cusomer exibiliy daa (asymmeric subgame, homogenous consumers). Figures 4a and 4b depic rms pro s depending on daa qualiy in he case of relaively homogenous consumers. On he lef gure, 4a, consumers are srongly homogeneous (l 3=2) and on he righ gure, 4b, hey are weakly homogeneous (l > 3=2). We can summarize our resuls as follows. Firm A, which holds cusomer exibiliy daa, follows a monopolizaion sraegy on is urf, which leaves no scope for a negaive compeiion e ec as he rival always charges he price of zero. Cusomer daa of a beer qualiy allows rm A o exrac more rens, such ha is pro s on he own urf increase in daa qualiy, while rm does no ge any 16

19 pro s here. On is own urf rm serves all consumers only when consumers are srongly homogeneous, in which case again he negaive compeiion e ec is absen, and he pro s of rm do no change wih daa qualiy. Oherwise, rm loses some consumers on is urf and su ers from inensi ed compeiion when he rival ges daa of a beer qualiy, and is pro s decrease in daa qualiy. We now urn o he case of relaively di ereniaed consumers. The following proposiion describes he equilibrium in he asymmeric subgame. Proposiion 3. (Asymmeric subgame wih relaively di ereniaed consumers.) Assume ha consumers are relaively di ereniaed in exibiliy and only rm A has daa on consumer exibiliy. Equilibrium prices, demand regions and pro s are as given in Table 3. Proof. See Appendix. Alhough rm A has informaional advanage over he rival, i does no serve all consumers on is urf. This happens for he same reason as in he symmeric subgame. Since on he segmen m = 1 consumers always remain relaively di ereniaed, rm A follows a marke-sharing sraegy here and loses some of he more exible consumers. Due o a negaive compeiion e ec he pro s of rm A on is urf decrease when is argeing abiliy improves. 12 Precisely, anicipaing he informaional advanage of rm A, rm responds by reducing is uniform prices, which serve as an anchor for he discriminaory prices of rm A. The pro s of rm on he rival s urf decrease as well, because boh is price and marke share become smaller. Due o is informaional advanage, in he asymmeric subgame rm A gains abou half of he consumers on he urf of rm, whereas in he symmeric subgame i serves consumers only on he segmen m = 1. The pro s of rm A on he rival s urf exhibi a U-shaped relaionship in k: They rs decrease and sar o increase a k = 1. Firm reduces he uniform prices on is urf o proec is marke shares, which consiues a negaive compeiion e ec for rm A s pro s here. On he oher hand, wih beer daa rm A can exrac more rens from consumers i serves. The laer e ec sars o dominae when daa qualiy becomes good enough. 13 Firm 12 Noe ha in he symmeric subgame he pro s of rm A on is urf exhibi a U-shaped relaionship in k. In ha case he srengh of he negaive compeiion e ec for rm A s pro s is limied. As rm can discriminae, i reduces is price o zero on he segmens wih relaively homogeneous consumers (m(k) 2). Then on hose segmens daa improvemen gives rise only o he ren-exracion e ec, where he pro s of rm A increase. Compeiion is only inensi ed on he segmen m(k) = 1, which provides a decreasing share of rm A s pro s on is urf when daa qualiy improves. 13 Noe ha on he urf of rm A is pro s always decrease in k, such ha he ren-exracion e ec never 17

20 Table 3: Equilibrium prices, demand regions and pro s in he asymmeric subgame. The case of relaively di ereniaed consumers. k = 0 ( ( 3(1 2x) p Am (x; k) = 4 if x 1 (1 2x) 2 (2x 1) p 2 if x > 1 m (x) = 2 if x 1 2 (2x 1) if x > " x 1 Consumers served by rm A: 2 & 4 x > 1 2 & < 2 A;NA A (0) = A;NA (0) = 5 32 k 1 3(1 2x) if x 1 2 k+2 2 & m = 1 >< m (k) (1 2x) + p m (x) if x 1 2 & m > 1 p p A (m; x; k) = (x) m (k) (2x 1) if x > 1 2 & m < 2k 1 5(2x 1) if x > 1 2 k+3 2 & m = 2k 1 (2x 1) if x > >: 1 2 k+3 2 & m = 2k 1 +1 ( 0 if x > 1 2 & m > 2k 1 +1 (1 2x) p (x) = if x 1 2 k (2x 1) if x > 1 k Consumers served by rm A: 6 4 A;NA A (k) = k 2 2k+2 x < 1 2 & 2 k+2 x 1 2 & 2 < < ( 2k 2 k ) x 1 2 & 0 < 2 k 3 2 k 2 A;NA (k) = k 2 2k+2 1

21 s pro s earned on is own urf decrease monoonically wih he improvemen in daa qualiy. I is forced ino a downward spiral where i mus charge lower prices while i sill loses marke shares. Figure 5 shows he combined e ec of daa qualiy on rms pro s on he wo urfs, where we used = 1. The pro s of rm decrease monoonically wih he improvemen in daa qualiy. The pro s of rm A in urn exhibi a U-shaped relaionship in daa qualiy, exacly as in he symmeric subgame (compare wih Figure 3). Profi 0.15 Firm A 0.10 Firm k Figure 5: Individual pro s and he qualiy of cusomer exibiliy daa (asymmeric subgame, relaively di ereniaed consumers). We used he values = 0 and = Acquisiion of cusomer daa In his subsecion we analyze rms incenives o acquire cusomer exibiliy daa in he rs sage of he game and is welfare implicaions. In paricular, we assume ha rms can obain daa on he exibiliy of all consumers in he marke wih an exogenously given precision k 1. For simpliciy, we assume ha daa can be acquired free of charge. Then daa acquisiion incenives are driven purely by pro consideraions. The following proposiion summarizes he main resuls, depending on consumer heerogeneiy in exibiliy. becomes dominan. The reason for his di erence in he behavior of rm A s pro s on he rival s and he own urf is ha he negaive compeiion e ec for rm A s pro s is sronger on he own urf. On rm A s urf he uniform price of rm approaches zero when daa qualiy becomes perfec as i arges he more exible consumers. On is own urf rm always charges a relaively high price argeed a he less exible consumers. 19

22 Proposiion 4. (Cusomer-daa acquisiion.) Firms decisions o acquire cusomer daa depend on consumer heerogeneiy in exibiliy as follows. i) If consumers are relaively homogeneous, for any k 1 here is a unique Nash equilibrium (in dominan sraegies) in Sage 1 where boh rms acquire cusomer exibiliy daa. oh rms are sricly beer-o compared o he case where none of he rms holds cusomer exibiliy daa. ii) If consumers are relaively di ereniaed, here are wo Nash equilibria where only one of he rms acquires cusomer daa if k = 1. If k 2 a prisoner s dilemma emerges: There is a unique Nash equilibrium (in dominan sraegies) where boh rms acquire cusomer exibiliy daa, making hem worse-o. Proof. See Appendix. Wih relaively homogeneous consumers in he absence of cusomer exibiliy daa every rm serves only consumers on is own urf and arges on each address he mos exible consumer. If one of he rms acquires cusomer daa, i gains consumers on he rival s urf (if consumers are weakly homogeneous, l > 3=2) and exracs more rens from consumers on is own urf. The unilaeral acquisiion of cusomer daa is hen always pro able. The bes response o he rival acquiring cusomer exibiliy daa is o do so as well. In ha case a rm gains consumers on he own urf (if consumers are weakly homogeneous, l > 3=2) and can exrac more rens from hem. In equilibrium boh rms acquire daa of any qualiy and heir pro s increase. Wih relaively di ereniaed consumers every rm has a unilaeral incenive o acquire cusomer daa of any qualiy. Alhough rm (he rm wihou daa) responds o daa acquisiion by charging lower prices on boh he rival s and he own urf, unilaeral daa acquisiion is sill pro able because rm A gains consumers on boh urfs due o is improved argeing abiliy. In conras, acquiring daa when he rival holds i is only pro able if daa qualiy is su cienly high, k 2. On he one hand, daa acquisiion allows rm o gain consumers on is own urf. On he oher hand, on hose segmens on rm s urf where rm A loses consumers, i reduces is price o zero. Only when daa qualiy is high enough, is his negaive e ec compensaed by he improved abiliy of rm o exrac rens from he less exible consumers on is urf (o whom rm A always charges he price of zero independenly of wheher rm holds exibiliy daa). These daa acquisiion incenives resul in equilibria such ha boh rms acquire exibiliy daa only when is qualiy is su cienly high, k 2. Oherwise, only one rm acquires 20

23 cusomer daa in equilibrium. In he nex proposiion we characerize he equilibrium pro s, consumer surplus and social welfare under any daa qualiy based on rms equilibrium decisions o acquire cusomer daa in he rs sage of he game. Proposiion 5. (Pro and welfare depending on daa qualiy.) Firms pro s, consumer surplus and social welfare depend on he qualiy of cusomer exibiliy daa as follows. i) If consumers are relaively homogeneous in exibiliy, under any k 0 he pro s of rm i = A;, consumer surplus and social welfare are given by i (k) = =4 + 1= 1= 2 3+k, CS(k) = v 3( + )= + ( )=2 k+2 and SW = v + =, respecively. ii) If consumers are relaively di ereniaed in exibiliy, under k = 0 rms pro s, consumer surplus and social welfare are A = respecively. If k = 1, hen A = 79=512, = 27=256, CS = v = 5=36, CS = v 31=72 and SW = v 11=72, 417=1024 and SW = v 151=1024. If k 2, he pro s of rm i = A;, consumer surplus and social welfare are given by i (k) = 5= 9 22(1+k) + 1= 1=2 3+k, CS(k) = v 11= 9 2 2k+2 + 1=2 k 1 3 = and SW (k) = v 1 + 1= 9 2 2k 1 =, respecively. Proof. See Appendix. When consumers are relaively homogeneous, boh rms acquire cusomer exibiliy daa of any qualiy. Wih cusomer daa every rm can exrac more rens from consumers on is urf, while he negaive compeiion e ec is absen here as he rival charges he price of zero boh wih and wihou cusomer daa. As a resul, following daa acquisiion each rm enjoys higher pro s, and he increase in pro s is larger, he beer is daa qualiy. oh wih and wihou cusomer daa every rm follows a monopolizaion sraegy on is urf and serves here all consumers, such ha social welfare is always maximized. Higher pro s following daa acquisiion hen go hand in hand wih a reducion in consumer surplus, and daa of a beer qualiy harms consumers more. When consumers are relaively di ereniaed, in equilibrium only one of he rms acquires cusomer daa if k = 1, and boh rms acquire daa if k 2. In he former case he pro s of rm A (acquiring cusomer daa) naurally increase. Firm is worse-o because i loses markes shares and charges lower prices on boh urfs. The share of consumers buying from he preferred rm increases because rm A gains more consumers on he own han on he rival s urf, such ha social welfare increases. Consumers are beer-o because boh he oal ransporaion 21

24 coss and heir paymens o he rms decrease. If daa qualiy is relaively high, k 2, rms end up in he prisoner s dilemma and are worse-o wih daa acquisiion. Inensi ed compeiion does no allow rms o make full use of cusomer daa, and heir pro s decrease. However, rms pro s decrease less if hey acquire daa of a beer qualiy. Daa acquisiion is bene cial for social welfare as he disribuion of consumers beween he rms becomes more symmeric. If rms acquire perfec cusomer daa, hen social welfare is maximized. Consumers bene from daa acquisiion, while he bene is smaller he beer is daa qualiy. 4 Comparison wih Liu and Serfes (2004) Our model is closely relaed o Liu and Serfes (2004, in he following: LS), who apply spaial model o invesigae rms incenives o acquire daa on consumer locaions (brand preferences) of various qualiy for hird-degree price discriminaion. Wih daa of a beer qualiy rms can idenify consumers as belonging o ner locaion segmens. According o he de niions inroduced in our analysis, in LS consumers are relaively di ereniaed (in ransporaion coss), because here is a consumer who can swich brands coslessly (consumer wih address x = 1=2). 14 This explains he similariy beween he resuls of LS and ours in he version wih relaively di ereniaed consumers. For insance, in LS in he symmeric subgame pro s also exhibi a U-shaped relaionship in daa qualiy, k. Precisely, a k = 1 each rm follows a marke-sharing sraegy on is urf because consumers are relaively di ereniaed here. Daa improvemen by one sep leads o a decrease in rms pro s due o a negaive compeiion e ec, as we showed in our analysis. A he nex sep pro s sar o increase, because he negaive compeiion e ec is absen on he segmen where rm A () sicks o a monopolizaion sraegy, m = 1 14 For he de niions inroduced in our analysis o be applicable o boh he model of LS and ours, we have o sae hem in a more general way, relaed o consumer ransporaion coss. Le d := (1 2x). Then in our model, for any address x < 1=2 on he urf of rm A consumers on any segmen m wih 2 m (k); m (k) can h i be characerized by d 2 d m (k); d m (k), where d m (k) = m (k)(1 2x) and d m (k) = m (k)(1 2x). We say ha consumers on segmen m are relaively homogeneous in ransporaion coss if d m (k)=d m (k) 2 and are relaively di ereniaed if d m (k) = 0, in which case lim dm (k)!0 d m (k)=d m (k) = 1. (In a similar way, segmens on he urf of rm can be characerized by e d := (2x 1)). Applying hose de niions o LS, we ge ha for any k 1 consumers are relaively di ereniaed in ransporaion coss on he segmens m(k) = 2 k 1 and m(k) = 2 k 1 + 1, because hese segmens conain a consumer who can swich brands coslessly (wih address x = 1=2). Di erenly, for any k 2 in LS consumers on he segmens m 2 k 1 1 and m 2 k are relaively homogeneous. Our de niions do no apply only o he case k = 0 in LS, where rms canno disinguish beween he urfs of each oher. 22

25 (m = 4), which conains half of he consumers on a rm s urf. In he asymmeric subgame in LS he pro s of rm A (holding cusomer daa) exhibi a U- shaped relaionship in daa qualiy, again exacly as in he version of our model wih relaively di ereniaed consumers. However, in LS pro s increase above he iniial level when daa qualiy becomes perfec, while in our model hey never reach ha level. This di erence is driven by he di erences in he cusomer daa available o he rms in LS and in our model. In our seup each rm has perfec daa on consumer addresses, such ha in he asymmeric subgame rm prices very aggressively he loyal consumers of he rival, and is price o hem approaches zero when he qualiy of exibiliy daa available o rm A becomes perfec. In LS rm canno disinguish among is own loyal consumers and hose of he rival in he asymmeric subgame. I hen charges a price which decreases in daa qualiy, bu approaches some posiive value when daa becomes perfec as rm aims o exrac rens from is loyal consumers, such ha he negaive compeiion e ec is no ha srong. As a resul rms incenives o acquire cusomer daa and heir welfare implicaions are similar in LS and in he version of our model wih relaively di ereniaed consumers. Precisely, boh rms acquire cusomer daa in equilibrium only when is qualiy is su cienly high resuling in a prisoner s dilemma for he rms and an increase in consumer surplus. However, di eren from LS, we ge wo asymmeric equilibria, where only one of he rms acquires cusomer daa, when daa qualiy is low. This is relaed o he di erence in he underlying equilibrium sraegies of he rms. In our model a rm always has a unilaeral incenive o acquire cusomer daa, while in LS his is he case only when daa qualiy is su cienly high. As expeced, in he version wih relaively homogeneous consumers our resuls are very di eren from hose of LS. In ha case boh rms acquire daa of any qualiy in equilibrium, because daa acquisiion gives rise only o he posiive ren-exracion e ec, while he negaive compeiion e ec is absen. The acquisiion of cusomer exibiliy daa reduces consumer surplus in ha case while i leaves social welfare unchanged. In summary, compared o LS, we idenify more scope for pro able cusomer daa acquisiion, which a he same ime harms consumers. 23