Abstract: Considering the differences of firms' digital capabilities, this paper studies how behavior-based pricing ( BBP ) affects pricing decisions, profits and strategy choices of both firms. We use Hotelling model to construct a two-period pricing model in a competitive market. By comparing prices and profits of both firms, the study reaches the following conclusions: (1) the equilibrium of the second period is jointly affected by the market share in the first period and digital capabilities gap, which leads to three possible equilibriums. Meanwhile, in the equilibrium of the second period, the price for current customers may be lower than that for new customers; (2) when the market share gap in the first period is large, BBP increases the profits of both firms in the second period. However, the profit of firm that shares a larger market in the first period is lower than the firm's competitor in the second period； (3) a pure strategy equilibrium exists, when the digital capability gap is large enough or small enough. Further, when the digital capability gap is large enough, the advantage firm can get new customers, which help it get rid of the prisoner's dilemma brought by BBP and achieve profit growth.

Key words: behavior-based pricing,  , digital capability,  , Hotelling model,  , asymmetric market