Retention strategies in a switching cost model

Abstract

With the developments in technology, firms can gather information about consumers´ purchase history which can be use to price discrimination accordingly. This type of price discrimination is designed in economic literature as Behaviour-Based Price Discrimination (BBPD) or dynamic pricing. This work is motivated by a recent report of the UK regulator for the communication markets (Ofcom (2010)), that raises concerns about the competitive and welfare effects of retention strategies. The aim of this paper is to analyze the effects of BBPD where firms apply retention strategies under a switching costs approach considering asymmetry on the switching costs of consumers (consumers have different switching costs) and the existence of a dominant firm.