Dual-Role Based Pricing in a Dynamic and Competitive Environment |
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Authors: | G E Fruchter |
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Institution: | (1) Graduate School of Business Administration, Bar-Ilan University, Ramat-Gan, 52900, Israel |
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Abstract: | The dual role of price, as a product attribute signaling quality and as a measure of sacrifice, serving as a benchmark for
comparing the utility gains from superior product quality, is now well established in the marketing and economic literature.
However, knowledge about their long-run impact and the influence of competition on these effects still remains very sparse.
In the current paper, with reference to a dynamic and competitive framework, an analytical model is proposed to help determining
optimal decision rules for price incorporating both roles. The main results are as follows: (i) The optimal pricing policy
is determined as a Nash equilibrium strategy. (ii) The resulting equilibrium price is higher than an equilibrium that disregards
the carryover price effects. (iii) For a symmetric competition, we provide normative rules on how firms should set prices
as a function of the perceived quality; particularly, how the price should be set initially, when there is little product
familiarity and the perceived quality is low, and how this price should vary as the perceived quality increases. (iv) At steady
state, we find that the level of equilibrium margin, in percentage terms, decreases with the elasticity of demand with respect
to the brand price, but this decrease is moderated by the elasticity of demand with respect to the brand perceived quality,
the cross elasticity of demand with respect to the competitor’s perceived quality and the effect of the competitor’s current
price on the firm’s perceived quality deterioration.
The author thanks Konstantin Kogan for helpful discussions and comments. |
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Keywords: | Marketing Price Price signaling quality Perceived quality Differential games Nash equilibrium |
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