Pricing Game for Customers with Performance-Price Ratio Utility: Theoretic Analysis and Empirical Calibration

Project: Research

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Performance-price ratio is a common concept for customers in making purchasing decisionsand a keyword for sellers in promoting their products. For example, Choice, the monthly magazinepublished by the Hong Kong Consumer Council, provides detailed analysis and testing reports forone category of products in every issue. At a prominent position, the overall performance ratedin stars is presented together with the price. This implies that customers evaluate a productbased on two-dimensional information: overall performance and price. The performance-priceratio plays a key role in the customer choice process and profoundly influences sellers' marketingstrategies.In the literature, utility-based choice models have received much attention in reflecting customerpurchasing behavior. These customer choice models provide us with effective tools forevaluating the efficiency of sales and promotion plans along with market competition. The mostcommonly used customer utility formulation is consumer surplus, which measures the differencebetween a customer's reservation price (determined by the product performance) and the productprice. Despite its widespread usage in academic literature, the surplus utility has two drawbacks.First, the surplus utility is a linear function of price, which implies that the effects of price changeon the utility are the same at different price levels. In contrast, considering the performance-priceratio, the most popular alternative utility form, the effect of price change on customer utility isrelated to price, i.e., the derivative of customer utility with respect to price is a non-constantfunction of price. Second, in the literature on pricing games, considerable attention is focused ondemonstrating the existence of equilibria. However, in the case of surplus utility, characterizinganalytic results such as closed-form solutions of equilibria and applying the model to real-life dataremain to be further developed.Therefore, the aim of this project is to incorporate the performance-price ratio utility into thecustomer choice model and investigate the following questions:1. How do customers behave under the performance-price ratio choice criterion?2. How is this behavior linked with retailers' revenue in a competitive market?3. Does this modeling approach derive analytical results which can assist retailers in developingtheir products?4. Is this theoretical model supported by the observations in practice?In addition, we also propose to explore how the retailer equilibrium decisions change in responseto a change in decision sequence, a change in market structure, and in the case where a newproduct enters the market. We intend to provide an alternative framework for the customerchoice model and carry out follow-up theoretical analysis based on the framework. In addition togenerating publications in leading journals, we also expect that our results could provide insightsinto the decision-making process of real-world customers and thus offer companies guidance onhow to adjust their strategies accordingly in the highly competitive market.


Project number9042579
Grant typeGRF
Effective start/end date1/09/1726/08/21