Pricing in a Customer Market

Abstract

In standard pricing models, movements in demand are partially offset by price responses. In a customer market, however, price markups may decrease with high demand. Thus, price may magnify, rather than stabilize, demand movements. I consider a monopolist selling a good of which first-time consumers are uncertain. Repeat customers know that the product works. The monopolist trades the objectives of exploiting past customers and attracting new ones. In a period with many new potential customers, the monopolist gives more weight to attracting and lowers its markup. Last, I examine some evidence on whether expansions are periods with disproportionately many new customers.