Segmented Switchers and Retailer Pricing Strategies

Abstract

Empirical studies reveal a surprisingly wide variety of pricing strategies among retailers, even among Internet sellers of undifferentiated homogeneous goods, such as books and music CDs. Several empirical findings remain puzzling; for example, within the same market, some small retailers decide to discount deeply, whereas others forgo the price-sensitive switchers and price high. The authors present theoretical and empirical analyses that address these varied pricing strategies. A model of three asymmetric firms shows that under multiple switcher segments, in which different switchers compare prices at different retailers, firm-specific loyalty is not sufficient to explain the variety of pricing strategies. The authors demonstrate that a retailer's strategy to discount deeply or frequently 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 situations in which a small retailer finds it optimal to price high, despite having few loyals, or to discount and go for the switchers. The results of two empirical studies confirm the model's predictions for varied pricing strategies in the context of Internet booksellers. The analyses also present several implications. A small retailer can sometimes benefit from strategically limiting its access to switchers to soften price competition. A midsized retailer can benefit from targeting its switcher acquisition activities toward its larger rival, given the shallower discounts involved. When most switchers widely compare prices, a large retailer should offer few shallow discounts because other firms will more aggressively discount. The importance of switcher segmentation suggests that managers should carefully measure switching behavior in devising pricing strategies.