Customized Discounts and Consumer Search: Encouraging or Discouraging Consumer Search

The increasing availability of big data is allowing firms to predict consumer search outcomes and outside options, providing them an informational advantage. This information advantage allows firms to price discriminate against consumers and deter them from searching for other firms by offering customized discounts based on their superior knowledge of consumers’ preferences. However, consumers’ ability to infer outside options from customized discounts undermines their effectiveness as search deterrence. Ironically, such discount may increase consumer’s incentives to search more, not less, leading to a considerable loss of consumers and a decline in profit. Moreover, we show that despite the ability to tailor discounts across a continuum of consumer valuations, a simple two-level discount scheme, comprising one uniform positive discount and zero discount, is a unique optimal equilibrium that maximize firm profitability. Our results are robust to various market conditions.