Personalised pricing, where businesses tailor the cost of goods or services to individual consumers based on detailed data about their willingness to pay, is often criticised for potentially pushing up prices for specific customers. However, new research suggests the practice may also undermine companies’ profits.

Consumers encounter personalised pricing in many forms, from targeted digital coupons and loyalty offers to “Buy Now, Pay Later” schemes that bundle sales with subsidised loans. Airlines, for example, increasingly use artificial intelligence to adjust fares for individual travellers. Such strategies rely on analysing a customer’s digital footprint—including purchase history, location, lifestyle, and even device type—to extract the highest possible payment from each buyer.

The drawback, according to Professor Liyan Yang of the University of Toronto’s Rotman School of Management, is that concealing prices from other customers removes a crucial source of market information. When prices are visible and competitive, consumers are reassured that more people will buy—a factor that boosts the appeal of products whose value grows with wider adoption, such as social media platforms or online marketplaces. Hidden prices, by contrast, create uncertainty and can lead to lower overall spending.

To explore this effect, Prof. Yang and Yan Xiong, now an associate professor at the University of Hong Kong Business School, used mathematical and game-theoretic modelling to examine network-based products. They found that when prices were hidden, companies tended to charge more per customer but ultimately made less profit compared with situations where prices were transparent.

The researchers also identified ways to avoid this pitfall. Businesses could commit to keeping prices within a set range, launch corporate social responsibility programmes to lower prices, build reputations for fairness, or start with low, transparent pricing to attract more users. Voluntary or government-imposed price caps could also help, with some jurisdictions such as China, the European Union, and the United States already exploring or implementing such measures.

While companies often resist regulation, Prof. Yang notes that certain price restrictions could, in theory, lead to better profitability in the long run. “There are trade-offs,” he says, adding that policymakers would need to “gauge precisely” where limits should be set to protect consumers while allowing businesses to find the pricing sweet spot that maximises both transparency and profit.

More information: Yan Xiong et al, Personalized pricing, network effects, and commitment, Journal of Economic Theory. DOI: 10.1016/j.jet.2025.106036

Journal information: Journal of Economic Theory Provided by University of Toronto, Rotman School of Management