Market Dominance and Behavior-Based Pricing Under Horizontal and Vertical Differentiation
University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF)
Federal Reserve Banks - Federal Reserve Bank of Boston
Hanken School of Economics
November 2, 2007
We evaluate behavior-based price discrimination from an antitrust perspective by focusing on an industry with inherited market dominance. Under horizontal differentiation behavior-based pricing does not by itself lead to persistence of dominance unless the dominant firm is protected by significantly higher switching costs than its small rival. This result continues to hold even if the dominant firm can use behavior-based pricing to compete against an entrant with no access to consumers' purchase histories. Under vertical differentiation behavior-based pricing enhances the dominance of the high-quality seller and, hence, consumer welfare.
Number of Pages in PDF File: 27
Keywords: market dominance, behavior-based pricing, consumer loyalty, poaching, price discrimination, horizontal and vertical differentiation
JEL Classification: D4, L1, L41
Date posted: November 8, 2007
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