The Impact of Intelligent Agents on Electronic Markets : Customization, Preference Revelation and Pricing

Apart from reducing buyer search costs, web-based commerce has also enabled the use ofintelligent agent technologies that reduce seller search costs by targeting buyers, customizing,and pricing products in real-time. Our model of an electronic market with customizable productsanalyzes the pricing, profitability and welfare implications of these agent-based technologiesthat price dynamically, based on product preference and demographic information revealed byconsumers. We find that in making the trade-off between better prices and better customization,consumers invariably choose less-than-ideal products. Furthermore, this trade-off impactsbuyers on the higher end of the market more, and causes a transfer of consumer surplus towardsbuyers with a lower willingness to pay. As buyers adjust their product choices in responseto better demand agent technologies, sellers may experience reduced revenues, since the gainsfrom better buyer information are countered by the lowering of the total value created fromthe transactions. We study the strategic and welfare implications of these findings, and discussmanagerial and technology development guidelines