ASYMMETRIC INFORMATION FLOWS IN CUSTOMER MARKETS

In customer markets an information asymmetry exists between a firm's current customers and prospective customers. When a firm changes its price, current customers are instantly aware of the price change, while potential customers are informed slowly of the change. The paper explicitly models this information imperfection and the associated asymmetry in firms' customer flows. The main result of the paper is that, because of the information asymmetry, there will be a range of marginal cost and demand over which the firm has no incentive to change price. It is also shown that prices will be more upwardly flexible than downwardly flexible. The size of the range, and the extent of downward price inflexibility, depends on the rate at which information is transmitted to customers.