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

Authors


  • We thank Mark Armstrong, Igal Hendel (the editor), two referees, seminar participants at Tulane University, University of Arizona, University of Colorado, University of Southern California, University of Toronto, and participants at the 2007 IIOC in Savannah and the 2007 Econometrics Society Meetings at Duke University for helpful comments and suggestions. Pearcy acknowledges financial support from the Committee on Research Summer Fellowship and the Research Enhancement Fund at Tulane University.

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.

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