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Economics and Finance Research Talk - 22 November

Speaker: Carlo Reggiani (Seville & University of Manchester) Topic: Exclusive Data, Price Manipulation and Market Leadership.

The rapid development of information systems has allowed many tech companies to gather and analyse vast amounts of individual consumer data, creating detailed consumer profiles. Some of these data is often complemented by the one collected by specialised data broker firms that have started selling consumer profiles to businesses. These granular consumer profiles, combined with powerful computing and algorithms, enable data-rich firms to offer real-time personalised deals. This article proposes a game-theoretical model to examine the issue of exclusive access to consumer data for price discrimination and its impact on competitive strategies and welfare by altering firms’ strategic incentives. We show that exclusive access to a list of consumers can provide incentives for a firm to endogenously assume the price leader’s role, and so to strategically manipulate its rival’s price. Prices and profits, however, are non-monotonic in the share of profiled consumers.

For an intermediate share, price leadership entails an equilibrium outcome characterised by supra-competitive prices and low consumer surplus.

For a limited share, the incentive to lead is absent, whereas for a large share competition kicks in and the price manipulation mechanism breaks down. These results hold qualitatively in a large number of extensions that include both firms owning data endowments, investing in data gathering or buying them from data brokers, loyal consumers being profiled, and imperfect information about consumers’ preferences.

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