Economics at your fingertips  

A model of product compatibility introduction with consumer recognition

Yuansheng Wei and Pei Huang

International Journal of Research in Marketing, 2019, vol. 36, issue 4, 613-629

Abstract: Firms recognizing consumers often use behavior-based pricing (BBP), i.e., condition prices on purchase history. Prior research studies the framework with independent product offerings and shows that BBP leads to poaching and decreases each firm's profits. In this paper, we investigate the efficacy of BBP in a two-period duopoly where firms provide compatible product categories and endogenously determine the levels of cross-compatibility. We first revisit the impact of behavior-based pricing in the traditional framework with independent offerings and verify the competition-increasing effect of BBP. We then examine how the impact of BBP differs when firms introduce product compatibility. Interestingly, we find that firms can benefit from BBP when firms introduce product compatibility. More specifically, when the value consumers obtain from perfect compatibility is moderate, implementing BBP is more profitable than without consumer recognition. The intuition is that when the value of perfect compatibility is medium, consumers do not expect good switching deals in the second period and firms can charge higher prices in the first period. Our findings not only complement the BBP literature but also shed light on the firms' strategic decisions on product compatibility.

Keywords: Product compatibility; Behavior-based pricing; Compatibility value (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.ijresmar.2019.03.001

Access Statistics for this article

International Journal of Research in Marketing is currently edited by Roland Rust

More articles in International Journal of Research in Marketing from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-05-02
Handle: RePEc:eee:ijrema:v:36:y:2019:i:4:p:613-629