Thursday, December 13, 2007
Posted by D. Daniel Sokol
Thomas Gehrig of the University of Freiburg Department - of Economics, Oz Shy of University of Haifa - Department of Economics and Rune Stenbacka of the Swedish School of Economics and Business Administration ponder Market Dominance and Behavior-Based Pricing Under Horizontal and Vertical Differentiation.
ABSTRACT: We evaluate behavior-based price discrimination from an antitrust perspective by focusing on an industry with inherited market domminance. 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.