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Should Price Increases Be Targeted?--Pricing Power and Selective vs. Across-the-Board Price Increases

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  • Aradhna Krishna

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Fred M. Feinberg

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Z. John Zhang

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

Firms in many industries experience protracted periods of pricing power, the ability to successfully enact price increases. In these situations, firms must decide not only whether to raise prices, but to whom. Specifically, in a competitive context, they must determine whether it is more profitable to increase prices across-the-board or to a specific segment of their customer base. While selective price decreases are ubiquitous in practice (e.g., better deals to potential new customers by phone carriers; better deals to current customers by various magazines), to our knowledge selective price increases are relatively rare. We illustrate the benefits of targeted price increases, and, as such, we expand the repertoire of firms' promotional policies. To that end, we explore a scenario where two competing firms must decide whether to increase prices to the entire market or only to a specific segment. Targeted price increases (TPI), i.e., being offered an unchanged price (selectively) when others are subject to price increases, can be offered to Loyals (those who bought from the firm in the previous period) or Switchers (those who did not). The effects of TPIs are estimated through a laboratory experiment and an associated stochastic model, each allowing for both rational (Loyalty, Switching) and behaviorist (Betrayal, Jealousy) effects. We find that TPIs can indeed yield beneficial results (greater retention for Loyals or greater attraction of Switchers) and greater profits in certain circumstances. Results for TPI are additionally benchmarked against those for targeted price decreases and are found to differ. The range of effects stemming from the experiment can be used in a competitive analysis to yield equilibrium strategies for the two firms. In this case, we find that--depending on the magnitude of the price increase, market shares of the two firms, and price knowledge across consumer segments--a firm may wish to embrace targeted price increases in some situations, to institute across-the-board price increases in others, and to not enact any price increases in still others. We show that a firm can sacrifice considerable profit if it settles on a suboptimal pricing strategy (e.g., wrongly instituting an across-the-board increase), favors the wrong segment (e.g., Switchers instead of Loyals), or ignores "behaviorist" effects (Betrayal or Jealousy).

Suggested Citation

  • Aradhna Krishna & Fred M. Feinberg & Z. John Zhang, 2007. "Should Price Increases Be Targeted?--Pricing Power and Selective vs. Across-the-Board Price Increases," Management Science, INFORMS, vol. 53(9), pages 1407-1422, September.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1407-1422
    DOI: 10.1287/mnsc.1060.0695
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    References listed on IDEAS

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    Cited by:

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    2. Liozu, Stephan M., 2019. "Make pricing power a strategic priority for your business," Business Horizons, Elsevier, vol. 62(1), pages 117-128.
    3. Lim, Leon Gim & Tuli, Kapil R. & Dekimpe, Marnik G., 2018. "Investors' evaluations of price-increase preannouncements," International Journal of Research in Marketing, Elsevier, vol. 35(3), pages 359-377.
    4. Ke-Wei Huang, 2009. "Optimal criteria for selecting price discrimination metrics when buyers have log-normally distributed willingness-to-pay," Quantitative Marketing and Economics (QME), Springer, vol. 7(3), pages 321-341, September.
    5. Juan Feng & Xin Li & Xiaoquan (Michael) Zhang, 2019. "Online Product Reviews-Triggered Dynamic Pricing: Theory and Evidence," Information Systems Research, INFORMS, vol. 30(4), pages 1107-1123, December.

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