Firm Size and Pricing Policy

Abstract:     
We relate pricing policy of firms to their size, where firm size is interpreted as the size of the clientele served by the concerned firm. We argue that a firm with a large clientele faces a more severe reputational backlash if it ‘reneges’, i.e., deviates from its earlier price offer. This allows the firm to effectively commit to its offers, leading to a unique equilibrium without delay. Interestingly, this equilibrium corresponds to the equilibrium of the related model that does not allow for reneging possibilities. For smaller firms, however, the reputational effects are much less intense, and consequently the equilibria may involve deviation possibilities. In this case, the equilibria are non-unique and may involve delays as well.

Number of Pages in PDF File: 15

Accepted Paper Series