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

20 Pages Posted: 10 May 2014

See all articles by Yongmin Chen

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Jason Pearcy

Montana State University - Bozeman - Department of Agricultural Economics and Economics

Date Written: December 4, 2010

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

Suggested Citation

Chen, Yongmin and Pearcy, Jason, Dynamic Pricing: When to Entice Brand Switching and When to Reward Consumer Loyalty (December 4, 2010). RAND Journal of Economics, Vol. 41, No. 4, 2010, Available at SSRN: https://ssrn.com/abstract=2434977

Yongmin Chen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Jason Pearcy (Contact Author)

Montana State University - Bozeman - Department of Agricultural Economics and Economics ( email )

Bozeman, MT 59717-2920
United States

HOME PAGE: http://www.montana.edu/jpearcy/

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