Journal of Industry, Competition and Trade

, Volume 12, Issue 4, pp 373–393 | Cite as

A Welfare Evaluation of History-Based Price Discrimination

Article

Abstract

We design an asymmetric duopoly model with inherited market dominance such that the dominant firm and the smaller firm can price discriminate based on consumers’ purchase history. We show that uniform pricing softens competition leading to higher industry profits than under history-based pricing. Consumers benefit from history-based price discrimination unless the switching cost is sufficiently high and the inherited degree of dominance is sufficiently weak. A ban on history-based pricing would typically introduce a distributional conflict between consumers and producers. Finally, we establish that the gains to industry profits associated with uniform pricing exceed the associated losses to consumers.

Keywords

market dominance history-based pricing consumer loyalty poaching price discrimination horizontal differentiation 

JEL Classification

D4 L1 L41 

Notes

Acknowledgements

We thank seminar participants at the Federal Reserve Bank of Kansas City, Federal Trade Commission, University of Michigan, University of Oslo, WZB, CCP at University of East Anglia, EARIE in Valencia, EEA in Milan, IO-Ausschuss in Bonn, ZEW, ESMT in Berlin, MPI in Bonn and in particular, three anonymous referees, Nils-Henrik von der Fehr, Martin Hellwig, Jos Jansen, Bruce Lyons, Gerd Muehlheusser, Tore Nilssen, Thomas Ronde, and Carl-Christian von Weizsäcker, for valuable comments on earlier drafts. Gehrig acknowledges the support of the Freiburg Institute of Advanced Studies (FRIAS). Stenbacka gratefully acknowledges financial support from RUESG, University of Helsinki, and the Yrjö Jahnsson Foundation. The views and opinions expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of FinanceUniversity of ViennaViennaAustria
  2. 2.CEPRLondonUK
  3. 3.Research DepartmentFederal Reserve Bank of BostonBostonUSA
  4. 4.Hanken School of EconomicsHelsinkiFinland

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