Strategic Loyalty Reward in Dynamic Price Discrimination

Abstract

International audienceIn a dynamic model with overlapping generations of consumers, we study duopolistic competition when firms can price discriminate, at each period, between their previous customers and the consumers that they have never served. Long-term contracts are not enforceable. In (Markov-perfect) equilibrium, one firm charges higher prices to its past customers than to its new customers, as past customers have revealed their strong preferences for the firm; the other firm, however, rewards its previous customers by charging lower prices to them than to its new customers. This loyalty reward strategy comes from the interplay between the firms’ usual incentive to extract surplus from consumers with revealed strong preferences and their incentives to acquire information and to recognize their young loyal customers. The result also relies on the firms’ inability a priori to tell different generations apart. It is the outcome of the unique equilibrium of a simplified two-period (or T-period) version of the game and holds with forward-looking consumers who are impatient enough

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“…As in the present paper, Liu and Serfes (2004) have found that moving from no discrimination (no information) to discrimination is bad for industry profits and good for consumer surplus. However, conditional on the availability of information, they have 14 For other recent papers on BBPD and customer recognition, see also Caillaud and De Nijs (2011), Chen and Pearcy (2010), Esteves (2010), Esteves and Vasconcelos (2014), Esteves and Reggiani (2014), Gehrig et al (2011Gehrig et al ( , 2012, Ghose and Huang (2009), Ouksel and Eruysal (2011, 2013. 15 They define targetability as a firm's ability to predict the preferences and purchase behaviors of individual consumers.…”

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“…For other recent papers on BBPD, see also Caillaud and De Nijs (), Chen and Pearcy (), Esteves and Reggiani (), and Gehrig et al. (, ).…”

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