Endogenous information acquisition in a competitive market with personalized pricing

Personalized pricing, enabled by the acquisition of consumer information, has become a widely adopted strategy across industries such as transportation and e-commerce. In practice, incumbent firms often possess a substantial reservoir of consumer information due to their sustained market presence, whereas entrant firms generally face a deficit in this regard. In such cases, entrant firms typically lack the capacity to implement personalized pricing and consequently face heightened vulnerability when competing against incumbent counterparts. Consequently, information acquisition is crucial for entrant firms, which should not be a hasty decision and is still unclear. To explore the mechanism behind the entrant firms’ information acquisition decision, we establish a duopoly setting consisting of an incumbent (firm H) with all available consumer information and an entrant (firm L) without it. Our findings indicate that firm L's information acquisition decision is influenced by firm H's pricing strategy, the scale of available consumer information, and the corresponding expenditure. Notably, firm L may not acquire all consumer information even with a sufficiently low expenditure. Moreover, contrary to conventional wisdom, information acquisition aimed at personalized pricing will ease price competition when the scale of available consumer information is large and the expenditure on information acquisition is low. Finally, information acquisition may decrease consumer surplus and social welfare, and we provide some managerial implications for regulators accordingly.