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Costly customer relations and pricing

  • M. Ali Choudhary
  • J. Michael Orszag

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.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 59 (2007)
Issue (Month): 4 (October)
Pages: 641-661

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Handle: RePEc:oup:oxecpp:v:59:y:2007:i:4:p:641-661
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