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Dynamic pricing: when to entice brand switching and when to reward consumer loyalty

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  • Yongmin Chen
  • Jason Pearcy

Abstract

This article develops a theory of dynamic pricing in which firms may offer separate prices to different consumers based on their past purchases. Brand preferences over two periods are described by a copula admitting various degrees of positive dependence. When commitment to future prices is infeasible, each firm offers lower prices to its rival's customers. When firms can commit to future prices, consumer loyalty is rewarded if preference dependence is low, but enticing brand switching occurs if preference dependence is high. Our theory provides a unified treatment of the two pricing policies and sheds light on observed practices across industries. Copyright (c) 2010, RAND..

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 41 (2010)
Issue (Month): 4 ()
Pages: 674-685

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Handle: RePEc:bla:randje:v:41:y:2010:i:4:p:674-685

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Cited by:
  1. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," UFAE and IAE Working Papers 789.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Rosa Branca Esteves, 2013. "Customer Poaching with Retention Strategies," NIPE Working Papers 02/2013, NIPE - Universidade do Minho.
  3. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
  5. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," Working Papers halshs-00622291, HAL.

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