DP6571 Market Dominance and Behaviour-Based Pricing under Horizontal and Vertical Differentiation

Author(s): Thomas Gehrig , Oz Shy , Rune Stenbacka

Publication Date: November 2007

Keyword(s): behavior-based pricing , consumer loyalty , horizontal and vertical differentiation , market dominance , poaching , price discrimination

JEL(s): D4 , L1 , L41

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6571.asp.asp

We evaluate behaviour-based price discrimination from an antitrust perspective by focusing on an industry with inherited market dominance. Under horizontal differentiation behaviour-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 behaviour-based pricing to compete against an entrant with no access to consumers' purchase histories. Under vertical differentiation behaviour-based pricing enhances the dominance of the high-quality seller and, hence, consumer welfare.