Should Price Increases Be Targeted? -- Pricing Power and Selective vs. Across-the-Board Price Increases

Management Science, Vol. 53, No. 9, September 2007, pp. 1407-1422

16 Pages Posted: 20 Jan 2015

See all articles by Aradhna Krishna

Aradhna Krishna

University of Michigan, Stephen M. Ross School of Business

Fred M. Feinberg

University of Michigan at Ann Arbor - Marketing; University of Michigan, Stephen M. Ross School of Business

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: 2007

Abstract

Firms in many industries experience protracted periods of pricing power, the ability to successfully enact price increases. In these situations, firms must decide not only whether to raise prices, but to whom. Specifically, in a competitive context, they must determine whether it is more profitable to increase prices across-the-board or to a specific segment of their customer base. While selective price decreases are ubiquitous in practice (e.g., better deals to potential new customers by phone carriers; better deals to current customers by various magazines), to our knowledge selective price increases are relatively rare. We illustrate the benefits of targeted price increases, and, as such, we expand the repertoire of firms' promotional policies. To that end, we explore a scenario where, two competing firms must decide whether to increase prices to the entire market or only to a specific segment. Targeted price increases (TPI), i.e., being offered an unchanged price (selectively) when others are subject to price increases, can be offered to Loyals (those who bought from the firm in the previous period) or Switchers (those who did not). The effects of TPIs are estimated through a laboratory experiment and an associated stochastic model, each allowing for both rational (Loyalty, Switching) and behaviorist (Betrayal, Jealousy) effects. We find that TPIs can indeed yield beneficial results (greater retention for Loyals or greater attraction of Switchers) and greater profits in certain circumstances. Results for TPI are additionally benchmarked against those for targeted price decreases and are found to differ. The range of effects stemming from the experiment can be used in a competitive analysis to yield equilibrium strategies for the two firms. In this case, we find that-depending on the magnitude of the price increase, market shares of the two firms, and price knowledge across consumer segments-a firm may wish to embrace targeted price increases in some situations, to institute across-the-board price increases in others, and to not enact any price increases in still others. We show that a firm can sacrifice considerable profit if it settles on a suboptimal pricing strategy (e.g., wrongly. instituting an across-the-board increase), favors the wrong segment (e.g., Switchers instead of Loyals), or ignores "behaviorist" effects (Betrayal or Jealousy).

Suggested Citation

Krishna, Aradhna and Feinberg, Fred M. and Zhang, Z. John, Should Price Increases Be Targeted? -- Pricing Power and Selective vs. Across-the-Board Price Increases (2007). Management Science, Vol. 53, No. 9, September 2007, pp. 1407-1422. Available at SSRN: https://ssrn.com/abstract=2552208

Aradhna Krishna (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Fred M. Feinberg

University of Michigan at Ann Arbor - Marketing ( email )

Ann Arbor, MI 48109
United States

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

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