Journal of Marketing Behavior > Vol 3 > Issue 2

Do Small Firms Pay to Stay? An Experimental Investigation

Ammara Mahmood, Wilfrid Laurier University, Canada, , Nir Vulkan, University of Oxford, UK,
Suggested Citation
Ammara Mahmood and Nir Vulkan (2018), "Do Small Firms Pay to Stay? An Experimental Investigation", Journal of Marketing Behavior: Vol. 3: No. 2, pp 121-152.

Publication Date: 13 Nov 2018
© 2018 A. Mahmood and N. Vulkan
Behavioral Decision Making
Pricing modelscompetitive marketing strategymarket share analysis


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In this article:
Literature Review 
The Model 
Appendix A 
Appendix B 
Introductory screen 


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.