Segmented switchers and retailer pricing strategies

Official URL: http://dx.doi.org/10.1509/jmkg.72.3.124

Empirical studies reveal a surprisingly wide variety of price promotion strategies among retailers, even among Internet sellers of undifferentiated homogenous goods such as books and music CD’s. Several empirical findings remain puzzling, particularly that within the same market some small retailers decide to deeply discount, while other small retailers forgo the price-sensitive switchers and price high to play their niche. We present theoretical and empirical analyses that address these varied pricing strategies. Our model of three asymmetric firms shows that under multiple switcher segments, where different switchers compare prices at different retailers, firm-specific loyalty is not sufficient to explain the variety of retailer pricing strategies. We demonstrate that a retailer’s pricing strategy is driven by the ratio of the size of switcher segments for which the retailer competes to its loyal segment size. The relative switcher-to-loyal ratios among retailers explain when a firm is more or less inclined to discount deeply or frequently. We thereby identify when a small firm finds it optimal to play the niche and price high, despite having few loyals, or to discount and go for the switchers. Our analysis reveals several interesting findings, such as a small firm that benefits from strategically limiting its access to switchers. The results of two empirical studies confirm our model’s predictions for varied retailer pricing strategies in the context of Internet booksellers.