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History-based versus uniform pricing in growing and declining markets

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  • Shy, Oz
  • Stenbacka, Rune
  • Zhang, David Hao

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.

Suggested Citation

  • Shy, Oz & Stenbacka, Rune & Zhang, David Hao, 2016. "History-based versus uniform pricing in growing and declining markets," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 88-117.
    • Handle: RePEc:eee:indorg:v:48:y:2016:i:c:p:88-117
    DOI: 10.1016/j.ijindorg.2016.06.002
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    References listed on IDEAS

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    Cited by:

    1. Stenbacka, Rune & Takalo, Tuomas, 2019. "Switching costs and financial stability," Journal of Financial Stability, Elsevier, vol. 41(C), pages 14-24.

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    More about this item

    Keywords

    Growing market; Declining market; History-based pricing; Uniform pricing; Consumer lock-in;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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