Intelligent agents in electronic markets for information goods:customization, preference revelation and pricing

Electronic commerce has enabled the use of intelligent agenttechnologies that can evaluate buyers, customize products, and price inreal-time. Our model of an electronic market with customizable productsanalyzes the pricing, profitability and welfare implications ofagent-based technologies that price dynamically based on productpreference information revealed by consumers. We find that in making thetrade-off between better prices and better customization, consumersinvariably choose less-than-ideal products. Furthermore, this trade-offhas a higher impact on buyers on the higher end of the market and causesa transfer of consumer surplus towards buyers with a lower willingnessto pay. As buyers adjust their product choices in response to betterdemand agent technologies, seller revenues decrease since the gains frombetter buyer information are dominated by the lowering of the totalvalue created from the transactions. We study the strategic and welfareimplications of these findings, and discuss managerial and technologydevelopment guidelines.