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Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data

B. Verhelst () and Dirk Van den Poel ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper uses scanner data at the individual customer level, compiled from the loyalty card database of a European retailer, to determine the importance of implicit contracts as a source of price stickiness. Drawing from Customer Relationship Management (CRM), we use segmentation techniques and cluster analysis to split up the customer base in three groups according to their behavioural loyalty to the retailer. We then perform a demand analysis on the loyal and nonloyal segments in parallel, discarding the large middle cluster. Our results from estimating a Behavioural Almost Ideal Demand System (B-AIDS) for numerous product categories reveal that loyal customers have a considerably more concave demand curve than non-loyals. This result holds true in the aggregate, and for all but some individual product categories. The more pronounced asymmetry in the price elasticity of demand for loyal customers is a major incentive for the retailer to commit to a sticky price.

Keywords: Customer loyalty; Clustering; Curvature of demand (search for similar items in EconPapers)
JEL-codes: C33 C38 D12 L14 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-03
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (9) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:12/776

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