Do small firms pay to stay? An experimental investigation
Through this study, we aim to reconcile differences in observed pricing behavior across industries by theoretically and empirically analysing the effect of market share on pricing strategies. Based on our proposed model of static competition, in equilibrium, symmetric competitors will offer discount...
| Main Authors: | , |
|---|---|
| Format: | Journal article |
| Published: |
Now Publishers
2018
|
| _version_ | 1797056123898953728 |
|---|---|
| author | Mahmood, A Vulkan, N |
| author_facet | Mahmood, A Vulkan, N |
| author_sort | Mahmood, A |
| collection | OXFORD |
| description | Through this study, we aim to reconcile differences in observed pricing behavior across industries by theoretically and empirically analysing the effect of market share on pricing strategies. Based on our proposed model of static competition, in equilibrium, symmetric competitors will offer discounts to new customers, while asymmetric competition provides sufficient conditions for small firms to offer loyalty rewards. We find that aggressiveness in pricing (difference in price to new and existing customers) decreases when markets become more competitive and market dominance (large inherited market share) is positively correlated with aggressive customer poaching. We further test our predictions by conducting a controlled experiment. In line with our predictions, we find that the price setting behavior of experimental participants varies with market share and that having a smaller inherited customer base results in loyalty rewards. Our work contributes to the behvaior based price discrimination literature by showing that a low inherited market share provides a sufficient condition for discounts to existing customers. The managerial implications of these findings are also discussed. |
| first_indexed | 2024-03-06T19:18:57Z |
| format | Journal article |
| id | oxford-uuid:1962d262-e5c8-438d-8cdf-5244801b65e5 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T19:18:57Z |
| publishDate | 2018 |
| publisher | Now Publishers |
| record_format | dspace |
| spelling | oxford-uuid:1962d262-e5c8-438d-8cdf-5244801b65e52022-03-26T10:48:45ZDo small firms pay to stay? An experimental investigationJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:1962d262-e5c8-438d-8cdf-5244801b65e5Symplectic Elements at OxfordNow Publishers2018Mahmood, AVulkan, NThrough this study, we aim to reconcile differences in observed pricing behavior across industries by theoretically and empirically analysing the effect of market share on pricing strategies. Based on our proposed model of static competition, in equilibrium, symmetric competitors will offer discounts to new customers, while asymmetric competition provides sufficient conditions for small firms to offer loyalty rewards. We find that aggressiveness in pricing (difference in price to new and existing customers) decreases when markets become more competitive and market dominance (large inherited market share) is positively correlated with aggressive customer poaching. We further test our predictions by conducting a controlled experiment. In line with our predictions, we find that the price setting behavior of experimental participants varies with market share and that having a smaller inherited customer base results in loyalty rewards. Our work contributes to the behvaior based price discrimination literature by showing that a low inherited market share provides a sufficient condition for discounts to existing customers. The managerial implications of these findings are also discussed. |
| spellingShingle | Mahmood, A Vulkan, N Do small firms pay to stay? An experimental investigation |
| title | Do small firms pay to stay? An experimental investigation |
| title_full | Do small firms pay to stay? An experimental investigation |
| title_fullStr | Do small firms pay to stay? An experimental investigation |
| title_full_unstemmed | Do small firms pay to stay? An experimental investigation |
| title_short | Do small firms pay to stay? An experimental investigation |
| title_sort | do small firms pay to stay an experimental investigation |
| work_keys_str_mv | AT mahmooda dosmallfirmspaytostayanexperimentalinvestigation AT vulkann dosmallfirmspaytostayanexperimentalinvestigation |