PRICE DISCRIMINATION WITH DEMARKETING

We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price-quality bundles of the product. A consumer's preference is private information. With demarketing...

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Bibliographic Details
Published inThe Journal of industrial economics Vol. 64; no. 4; pp. 773 - 807
Main Authors Kim, Jaesoo, Shin, Dongsoo
Format Journal Article
LanguageEnglish
Published Oxford John Wiley & Sons Ltd 01.12.2016
Blackwell Publishing Ltd
Subjects
Consumers
Costs
Discrimination
Economic models
Marketing
Monopolies
Prices
Pricing policies
Product quality
Quality
Sales
Valuation
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Summary:We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price-quality bundles of the product. A consumer's preference is private information. With demarketing, consumers must make a costly effort to purchase and/or utilize the product, whereas with marketing, the seller instead makes the effort so that the consumer's purchasing decision is independent of the cost of effort. Our result suggests that, for small or large effort costs, it is optimal for the seller to engage in marketing. For intermediate effort costs, however, demarketing can be optimal. With demarketing, the seller induces only the consumers with high valuation to make transaction effort. By doing so, the seller can price discriminate more effectively, thus extracting more surplus We extend our analysis to the case where the seller can offer special deals through exclusive sales channels along with demarketing. Then, demarketing can be optimal even for large costs of effort.
Bibliography:We are grateful to the Editor and three anonymous referees for helpful comments and suggestions. We also thank Michael Baye, Jay Pil Choi, Subir Chakrabarti, Thomas Jeitschko, Fahad Khalil, Jacques Lawarree, Ching‐to Albert Ma, Henry Mak, Arijit Mukherjee, Stephen Salant, Huanxing Yang, Keith Everett and seminar participants at Midwest Economic Theory Meetings, IIOC, IUPUI, Kelley School of Business at Indiana University, Michigan State University, and Santa Clara University for helpful comments. Financial Support from the Leavey Research Grant is acknowledged.
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ISSN:0022-1821
1467-6451
1467-6451
DOI:10.1111/joie.12129