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Oxford Economic Papers Advance Access published online on May 15, 2007
Oxford Economic Papers, doi:10.1093/oep/gpm003
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© Oxford University Press 2007 All rights reserved

Costly customer relations and pricing

M. Ali Choudhary* and J. Michael Orszag{dagger}

*Department of Economics, University of Surrey, Surrey GU2 7XH; e-mail: a.choudhary@surrey.ac.uk
{dagger}Watson Wyatt LLP


  Abstract

In this paper we show that when a monopolist incurs certain costs for servicing or maintaining its customer-base, price markups may decrease with high demand — i.e. markups are countercylical. Indeed, for a given market share when demand booms each customer on average will purchase more output and the costs of servicing clients are spread across a larger volume of output sold. This increasing-return effect raises the incentive for the monopolists to expand its market-share by reducing markups. We also find evidence on UK data that industries with higher customer-care costs tend to have a higher degree of coutercyclical markups as compared with industries with lower such costs.

Key Words: JEL classifications: D4 • E32 • C61


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