Pricing In The Customer‐Market Model With Uncertainty

The common interpretation of the customer‐market model of Phelps and Winter (in Phelps et al. (eds), Microeconomic Foundations of Employment and Inflation Theory, New York, Norton, 1970) is that firms will charge a price lower than the static monopoly mark‐up because monopolistic pricing policy is moderated by the potential effect of high prices on customer‐flows between sellers. This paper extends the customer‐market model to incorporate stochastic customer‐flows and shows that in this setting the resultant dynamic mark‐ups could potentially exceed the static monopoly mark‐ups. Indeed, with an unpredictable nature of customer‐flows firms tend to care less about future business and are less keen on investing in customers through lower mark‐ups. We also present empirical evidence which positively links mark‐ups with proxies for customer‐flow randomness.