Variable Pricing in Oligopoly Markets*

Firms continuously vary the prices of their products in the marketplace. These variations sometimes exhibit consistent patterns, such as higher-priced products having greater price variability. For example, in the grocery industry, more expensive stores tend to have more frequent price changes (Information Resources Inc. 1993). Similarly, with airlines, the lowerpriced, low-frills Southwest Airlines has less price variability than the major national carriers American Airlines and Delta. In telephone services, the large national long-distance carriers are more expensive and have more variable pricing than discount carriers such as 10-10-220 or bigzoo.com. From these examples, one can conceptualize a firm as making a choice of an average price and price variability as part of its strategic pricing decision. In the simplest case, consider a matrix of high or low 2 # 2 average prices versus high or low price variability. Which quadrant should a firm select? How will its decision be affected by a competitor’s quadrant choice? Our goal is to provide answers to these questions.