Strand, Niklas: Pricing Contracts with Different Duration: The Role of Switching Costs
World Conference Econometric Society, 2000, Seattle

Niklas Strand, Stockholm School of Economics
Pricing Contracts with Different Duration: The Role of Switching Costs
Session: C-8-20  Monday 14 August 2000  by Strand, Niklas
We study the pricing of subscription contracts and examine the relative prices of short and long contracts. In a simple model of a monopolist selling contracts with different duration we show that customers have to pay a premium in order to buy a short contract rather than a long. It is the consumers with low average valuation who pay the higher price. We show that a larger switching cost will lower the premium on shorter contracts. This prediction is supported by data from the Swedish daily newspaper industry for the years 1975-1994. Our model also shows that switching costs make it less attractive to offer separating contracts in subscription markets. When switching cost are large firms rather pool customer groups or sell only to the customers with high willingness to pay. This prediction can not be rejected by estimation on the data. Additionally, when we investigate the interplay between market structure and price discrimination we find that firms with more market power use significantly more price discrimination.


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