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History-based price discrimination and entry in markets with switching costs: A welfare analysis

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Author Info

  • Gehrig, Thomas
  • Shy, Oz
  • Stenbacka, Rune

Abstract

We analyze history-based price discrimination in an asymmetric industry, where an incumbent, protected by switching costs, faces an entrant who does not have access to information about consumers' purchase histories. We demonstrate that consumer surplus is higher with uniform pricing than with history-based price discrimination. We find that the entry decision is invariant to whether the incumbent implements history-based pricing or uniform pricing. This implies that the potential abuse of market dominance imposed by history-based price discrimination is exploitation, not exclusion. Finally, we establish that the profit gain to the incumbent from history-based pricing exceeds the associated loss to consumers.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 5 (June)
Pages: 732-739

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:5:p:732-739

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: History-based pricing Price discrimination Entry Switching costs Abuse of market dominance Exclusionary abuse Exploitative abuse Ban on price discrimination;

References

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  1. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  2. Thomas Gehrig & Rune Stenbacka, 2004. "Differentiation-Induced Switching Costs and Poaching," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 635-655, December.
  3. Karlinger, Liliane & Motta, Massimo, 2007. "Exclusionary Pricing and Rebates When Scale Matters," CEPR Discussion Papers 6258, C.E.P.R. Discussion Papers.
  4. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, April.
  5. Yongmin Chen, 2008. "DYNAMIC PRICE DISCRIMINATION WITH ASYMMETRIC FIRMS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 729-751, December.
  6. Gehrig, Thomas & Stenbacka, Rune, 2007. "Information sharing and lending market competition with switching costs and poaching," European Economic Review, Elsevier, vol. 51(1), pages 77-99, January.
  7. Cheung, Francis K. & Wang, X. Henry, 1999. "A note on the effect of price discrimination on entry: Research note," Journal of Economics and Business, Elsevier, vol. 51(1), pages 67-72, January.
  8. Jan Bouckaert & Hans Degryse & Theon Van Dijk, 2008. "Price Discrimination Bans on Dominant Firms," CESifo Working Paper Series 2192, CESifo Group Munich.
  9. Taylor, Curtis R., 2000. "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," Working Papers 00-12, Duke University, Department of Economics.
  10. Armstrong, Mark & Vickers, John, 1993. "Price Discrimination, Competition and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 335-59, December.
  11. Sílvia Jorge & Cesaltina Pires, 2007. "Entry Decision and Pricing Policies," Working Papers de Economia (Economics Working Papers) 41, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  12. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  13. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  14. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-84, June.
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Citations

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Cited by:
  1. Bouckaert, J.M.C. & Degryse, H.A. & Dijk, T. van, 2012. "Bertrand Competition with an Asymmetric No-Discrimination Constraint," Discussion Paper 2012-004, Tilburg University, Tilburg Law and Economic Center.
  2. Oz Shy & Rune Stenbacka, 2011. "Customer recognition and competition," Working Papers 11-7, Federal Reserve Bank of Boston.
  3. Rosa Branca Esteves & Joana Resende, 2013. "Competitive Targeted Advertising with Price Discrimination," NIPE Working Papers 07/2013, NIPE - Universidade do Minho.
  4. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
  5. repec:hal:wpaper:halshs-00622291 is not listed on IDEAS
  6. Rosa Branca Esteves, 2013. "Customer Poaching with Retention Strategies," NIPE Working Papers 02/2013, NIPE - Universidade do Minho.
  7. Jan Bouckaert & Hans Degryse & Theon van Dijk, 2012. "Betrand Competition with an Asymmetric No-discrimination Constraint," Bruges European Economic Research Papers 23, European Economic Studies Department, College of Europe.
  8. Oz Shy & Rune Stenbacka, 2012. "Investment in customer recognition and information exchange," Working Papers 12-4, Federal Reserve Bank of Boston.
  9. De Nijs, Romain, 2013. "Information provision and behaviour-based price discrimination," Information Economics and Policy, Elsevier, vol. 25(1), pages 32-40.
  10. Rosa-Branca Esteves, 2012. "Price Discrimination with Private and Imperfect Information," NIPE Working Papers 12/2012, NIPE - Universidade do Minho.

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