History-Based versus Uniform Pricing in Growing and Declining Markets

36 Pages Posted: 24 Oct 2015 Last revised: 6 Apr 2018

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

David Hao Zhang

Harvard University

Date Written: May 13, 2016

Abstract

We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.

Keywords: Growing market, declining market, history-based pricing, uniform pricing, consumer lock-in

JEL Classification: L1, L4

Suggested Citation

Shy, Oz and Stenbacka, Rune and Zhang, David Hao, History-Based versus Uniform Pricing in Growing and Declining Markets (May 13, 2016). Available at SSRN: https://ssrn.com/abstract=2677697 or http://dx.doi.org/10.2139/ssrn.2677697

Oz Shy (Contact Author)

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)

David Hao Zhang

Harvard University ( email )

Cambridge, MA
United States

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