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Costly customer relations and pricing

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  • M. Ali Choudhary
  • J. Michael Orszag

Abstract

In this paper we show that when a monopolist incurs certain costs for servicing or maintaining its customer-base, price markups may decrease with high demand — i.e. markups are countercylical. Indeed, for a given market share when demand booms each customer on average will purchase more output and the costs of servicing clients are spread across a larger volume of output sold. This increasing-return effect raises the incentive for the monopolists to expand its market-share by reducing markups. We also find evidence on UK data that industries with higher customer-care costs tend to have a higher degree of coutercyclical markups as compared with industries with lower such costs. Copyright 2007 , Oxford University Press.

Suggested Citation

  • M. Ali Choudhary & J. Michael Orszag, 2007. "Costly customer relations and pricing," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 641-661, October.
  • Handle: RePEc:oup:oxecpp:v:59:y:2007:i:4:p:641-661
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    File URL: http://hdl.handle.net/10.1093/oep/gpm003
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    Cited by:

    1. Ali Choudhary & Thorlakur Karlsson & Gylfi Zoega, 2009. "Survey Evidence on Customer Markets," Birkbeck Working Papers in Economics and Finance 0916, Birkbeck, Department of Economics, Mathematics & Statistics.
    2. M. Ali Choudhary, 2004. "Connecting People," School of Economics Discussion Papers 0404, School of Economics, University of Surrey.

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