Information Personalization in a Two Dimensional Product Differentiation Model: Impact of Market Structure and the Quality-Fit Ratio

In this research, we use a game-theoretic model to examine personalization of information in a two-dimensional product differentiation model, when consumers attach importance to ´preference fit´ as well as ´product quality´. We report the equilibrium in terms of two factors: one, the extent of firms´ ex-ante horizontal differentiation; and two, the ´Quality-Fit´ (Q-F) Ratio, which measures the relative strength of consumer preferences on each dimension of product differentiation. Under different conditions, personalization adoption by one firm in a duopoly can be profitable for neither firm, one firm or both firms. We also highlight conditions under which investments in personalization and product quality can be complements or substitutes to each other. Finally, we show that different values of the Q-F Ratio can lead a competitor to respond to a firms´ personalization by either increasing investments in its own quality (aggressive response) or by reducing investments in its own quality (defensive response).