Dynamic Pricing: When to Entice Brand Switching and When to Reward Consumer Loyalty

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.

Keywords: dynamic pricing, brand switching, consumer loyalty, preference dependence

JEL Classification: D2, L1