History-based versus uniform pricing in growing and declining markets

Oz Shy; Rune Stenbacka; David Hao Zhang

doi:10.1016/j.ijindorg.2016.06.002

History-based versus uniform pricing in growing and declining markets

Oz Shy, Rune Stenbacka, David Hao Zhang

Economics, Helsinki

Research output: Contribution to journal › Article › Scientific › peer-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 language	English
Peer-reviewed scientific journal	International Journal of Industrial Organization
Volume	48
Issue number	September
Pages (from-to)	88-117
Number of pages	30
ISSN	0167-7187
DOIs	https://doi.org/10.1016/j.ijindorg.2016.06.002
Publication status	Published - 2016
MoE publication type	A1 Journal article - refereed

Keywords

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

Access to Document

10.1016/j.ijindorg.2016.06.002

https://ssrn.com/abstract=2677697

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Shy, O., Stenbacka, R., & Zhang, D. H. (2016). History-based versus uniform pricing in growing and declining markets. International Journal of Industrial Organization, 48(September), 88-117. https://doi.org/10.1016/j.ijindorg.2016.06.002

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