History-based versus uniform pricing in growing and declining markets

Oz Shy, Rune Stenbacka, David Hao Zhang

Research output: Contribution to journalArticleScientificpeer-review

2 Citations (Scopus)

Abstract

We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.
Original languageEnglish
Peer-reviewed scientific journalInternational Journal of Industrial Organization
Volume48
Issue numberSeptember
Pages (from-to)88-117
Number of pages30
ISSN0167-7187
DOIs
Publication statusPublished - 2016
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • growing market
  • declining market
  • history-based pricing
  • uniform pricing
  • consumer lock-in

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