Intertemporal pricing in new product introduction
Student thesis: Doctoral Thesis
Related Research Unit(s)
When a new durable product is launched into the market, the seller may encounter various problems. This dissertation consists of two essays, studying two different issues in new product introduction and examining how a durable-goods monopolist can strategically price the product intertemporally to tackle these issues. The first essay studies the problem of a potential imitative entry facing a monopolistic firm who firstly introduces a durable and innovative product into the market. Imitative products are evident and pervasive around the global market. To investigate the impacts of imitative entry, we propose a game-theoretical model which captures the dynamic interaction between an innovator and an imitator in a two-period framework. Our result shows that when consumers' acceptance level of imitative product is high, the innovator may be better off tolerating the imitative entry, rather than deterring it as suggested by most previous literatures. And surprisingly, when the imitative entry is tolerated, the innovator may gain more profits than the maximum it can earn in the absence of imitation. The reason is that when the innovator acts as a monopolist and intends to target on the more profitable highend consumers only, it suffers from the time-inconsistency problem that the highend consumers can hardly be convinced to purchase earlier unless the innovator strategically distort the quality upward to increase in the marginal cost of production and deny the future revenue from the low valuation consumers. With the threat of imitative entry, the low-end market is less profitable for the innovator and, as a result, the cost inefficiency incurs in quality distortion is reduced and the innovator gains more. The first essay focuses on exploring the influences of threat from imitative entry in the presence of strategic consumers, who are assumed to have perfect information about their valuation of both the innovative and imitative products. Nevertheless, in reality, when a product is new to the market, it is typical that consumers do not have prior knowledge of their idiosyncratic gains from adopting the product, whereas the firm owns perfect information about the market. In the second essay, we study a monopolistic firm's pricing strategy when consumers are uncertain about the value of product and vary in their risk attitudes. Normally, prior to the product introduction, the firm is able to obtain more accurate market information by evaluating consumers' valuations and predicting the response of market through costly market research. However, the firm always lacks the ability to credibly convey this information to the market since it is always in the firm's best interest to announce good information to increase consumers' willingness to pay. As a result, the adverse selection problem arises such that the firm is unable to charge a price higher than the consumers' ex ante willingness to pay even if the firm knows that most consumers would have a high product valuation after purchase. This situation may change if the consumers have different attitudes toward the consumption risks. With heterogeneous risk attitudes, consumers react to the price of a product in different ways. If some consumers discover their true valuations in the first period after purchase, they will reveal their information to the market and thereby, the consumers who remain in the market may learn from the early adopters. By examining the firm's intertemporal pricing strategy with regard to whether to induce or prevent information dissemination among consumers, the second essay investigates the influence of consumers' heterogeneous risk attitudes on the firm's profitability. The results show that under certain conditions the firm may be beneficial from the presence of risk-averse consumers since the information communicated between consumers is more convincing than the information conveyed by the firm, which partially remedies the adverse selection problem.
- Pricing, New products, Marketing