Wednesday, November 2, 2011
Posted by D. Daniel Sokol
Bernard Caillaud (Paris School of Economics) and Romain De Nijs (Paris School of Economics) explain Strategic loyalty reward in dynamic price Discrimination.
ABSTRACT: This paper proposes a dynamic model of duopolistic competition under behaviorbased price discrimination with the following property: in equilibrium, a firm may reward its previous customers although long term contracts are not enforceable. A firm can offer a lower price to its previous customers than to its new customers as a strategic means to hamper its rival to gather precise information on the young generation of customers for subsequent profitable behavior-based pricing. The result holds both with myopic and forward-looking, impatient enough consumers.