The Costly Path to Personalized Pricing: Why Private Data Production Is Wasteful
Lefez: "The Production of Information to Price Discriminate" CRC Discussion Paper No. 535
Firms are increasingly investing substantial resources in transforming raw data—a digital resource yet unfit for direct use—into “insights” that inform their pricing strategies. These insights often take the form of market segmentations used by monopolistic sellers to price discriminate among consumer groups. Willy Lefez’s (HU Berlin, Project B02) new discussion paper, “The Production of Information to Price Discriminate,” studies the welfare implications when a seller endogenously produces these market segmentations at a cost.
The core findings suggest that the private production of information by sellers is significantly inefficient. Lefez demonstrates that the welfare-maximizing solution—the efficient market segmentation chosen by a planner—allocates all the gains in total surplus to the buyer. Consequently, the seller’s profit remains at the uniform pricing level, meaning the welfare-optimal information production coincides with the buyer-optimal one. Unlike models where information is free and misalignment is limited, this stark misalignment emerges specifically under costly information production.
This profound difference in outcomes is rooted in how the private seller and the planner approach the cost of information. The efficient segmentation minimizes production costs by ensuring that all but one segment are indecisive, meaning the seller is indifferent between multiple possible prices. The planner utilizes these indecisive posteriors to induce lower prices with minimal spreading effort.
Conversely, the profit-maximizing seller produces information to improve decision-making, intuitively finding it suboptimal to generate posteriors where multiple prices are equally viable. The seller’s solution is robustly characterized by decisive posteriors, where only one price maximizes profit in each segment. This robust support distortion—the difference between the indecisive segments favored by the planner and the decisive segments chosen privately—is the key structural reason why private incentives fail to deliver efficient surplus gains to society.
Link (pdf): The Production of Information to Price Discriminate
