1 Electronic Commerce, Price Discrimination and Mass Customisation

As consumer e-commerce matures, on-line retailers are adopting personalisation technologies, enabling them to exploit information about individual consumers in order to tailor both products and prices to individual requirements. Thus firms can engage in two new competitive strategies – first degree price discrimination and mass customisation. In this first part of this paper we present a model of duopolistic competition between firms capable of using first-degree price discrimination. These firms are able to extract more surplus from their customers, but also face more intense competition, because they compete, in effect, for each and every consumer in the market. Whether or not firms will choose to use this new technology will depend on whether or not the enhanced surplus extraction effect dominates the intensified competition effect. We present a model that makes these ideas precise, and characterise the conditions under which firms will choose to employ first-degree price discrimination technologies. In the second part of the paper, we extend the analysis to include mass customisation and develop a simple framework within which to understand firms ’ incentives to adopt the strategies of first-degree price discrimination and mass customisation in a competitive environment. In particular we examine the interaction between the two decisions. We show that the incentives to use one technology increase with the use of the other, but also that firms are in a prisoners dilemma since they would be better off if they neither customised nor engaged in first-degree price discrimination