Strategic Intertemporal Pricing with Heterogeneous Risk Attitudes for Efficient Product Evaluation, Learning, and Adoption

Description

While a new product is introduced into the market, consumers are typically ex ante uncertain about how much they are willing to pay for it. To resolve this uncertainty before purchasing, they may engage in a costly evaluation to learn their product valuation. The proposed research aims to investigate the firm’s strategic intertemporal pricing with regard to whether to induce or prevent the consumers to evaluate by taking into consideration their various risk attitudes. Specifically, we propose a two-period model where a monopolistic firm launches its product at the beginning of the first period and sells it over two periods. In each period, the firm determines whether to induce or prevent evaluation by setting a price for this period that maximizes its expected profits. All consumers arrive at the outset and after observing the price in the first period, they strategically make trade-offs between the expected utility from evaluation versus that from purchasing with no information. While consumers differ in their risk attitudes, they may act in different ways. If some consumers discover their true valuations in the first period through evaluation or purchase, they will reveal their information to the market. As a result, the consumers who have neither evaluated nor purchased in the first period may learn from the early adopters and make their purchase decisions accordingly in the second period. We plan to investigate how the consumers’ risk attitudes influence their evaluation decisions and the firm’s intertemporal pricing strategies. In addition, we will explore whether the consumer heterogeneity in risk attitudes benefits or hurts the firm’s profitability as well as the social welfare.