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How the Client Effect Moderates Price Competition

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  • Dwight R. Lee
  • Richard B. McKenzie

Abstract

Why is unregulated competition supposed to drive price down to ruinous levels in some high fixed‐cost‐low marginal‐cost industries (e.g., railroads) but not in others (e.g., hotels)? We argue that price competition is moderated in high fixed‐cost‐low marginal‐cost industries when the value one consumer realizes from the service is affected by the characterics of other consumers. We develop a simple model of this client effect using the example of the demand for hotels and then generalize the implications of our model to other industries.

Suggested Citation

  • Dwight R. Lee & Richard B. McKenzie, 1998. "How the Client Effect Moderates Price Competition," Southern Economic Journal, John Wiley & Sons, vol. 64(3), pages 741-752, January.
    • Handle: RePEc:wly:soecon:v:64:y:1998:i:3:p:741-752
    DOI: 10.1002/j.2325-8012.1998.tb00091.x
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    Cited by:

    1. Richard B. McKenzie, 2004. "Monopoly: A Game Economists Love to Play—Badly!," Southern Economic Journal, John Wiley & Sons, vol. 70(4), pages 714-730, April.

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