The Dynamic Effect of Price Discrimination in Business Markets

First-degree price discrimination is a prevalent practice in business markets given the private nature of the interactions between buyers and sellers. Some customers accept paying higher prices because they have imperfect information about the distribution of prices or cannot afford to switch to an alternative in the short run. However, customers may become aware (imperfectly) where the prices paid fall in the overall distribution of prices, triggering changes that can affect their purchasing behavior. Using a dynamic model, we show that customers change their purchasing behavior over time. By combining an autoregressive process with a hidden-Markov model, we disentangle pricing dynamics from non-price factors that occur as customers become more experienced with a product. We show that price discrimination can shift customers to a more price attentive state and increase price sensitivity. These effects are observed in terms of quantity purchased and inter-purchase time. We identify salesperson and product portfolio factors that affect customers’ reaction to price discrimination. We find that salespeople vary widely in terms of the subsequent customers responses, i.e. some salespeople can sell at higher prices without an effect on quantity purchased, or increased price sensitivity. We also show that there is a relationship between a salesperson charging more dispersed prices and a customer becoming more price sensitive over time. Product portfolio plays an important role: customers who purchase a broader product range show lower price sensitivity. Cross-product spillover effects are significant, implying that high prices in one product leading to lower quantity of purchase and longer inter-purchase time for other products. Together, these results show that pricing in one product has consequences for customer management across all products. We discuss the implications of these findings for customer profitability, salesforce management and price rigidity.