Market Dominance and Behavior-Based Pricing Under Horizontal and Vertical Differentiation

27 Pages Posted: 8 Nov 2007

See all articles by Thomas Gehrig

Thomas Gehrig

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); Systemic Risk Centre - LSE

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

Date Written: November 2, 2007

Abstract

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.

Keywords: market dominance, behavior-based pricing, consumer loyalty, poaching, price discrimination, horizontal and vertical differentiation

JEL Classification: D4, L1, L41

Suggested Citation

Gehrig, Thomas and Shy, Oz and Stenbacka, Rune, Market Dominance and Behavior-Based Pricing Under Horizontal and Vertical Differentiation (November 2, 2007). Available at SSRN: https://ssrn.com/abstract=1027575 or http://dx.doi.org/10.2139/ssrn.1027575

Thomas Gehrig (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom
London

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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