Journal of Marketing Behavior > Vol 3 > Issue 2

Do Small Firms Pay to Stay? An Experimental Investigation

Ammara Mahmood, Wilfrid Laurier University, Canada, ammahmood@wlu.ca Nir Vulkan, University of Oxford, UK, Nir.vulkan@sbs.ox.ac.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. http://dx.doi.org/10.1561/107.00000048

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

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In this article:
Introduction
Literature Review
The Model
Experiment
Results
Discussion
Appendix A
Appendix B
Introductory screen
References

Abstract

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.

DOI:10.1561/107.00000048