Article ID: | iaor20084243 |
Country: | Netherlands |
Volume: | 176 |
Issue: | 1 |
Start Page Number: | 482 |
End Page Number: | 497 |
Publication Date: | Jan 2007 |
Journal: | European Journal of Operational Research |
Authors: | Khouja Moutaz, Smith Michael Alan |
Keywords: | marketing, decision theory |
We analyze the pricing decision of a firm selling a product for which there is a significant and continuous saturation effect over time and that can be pirated. Assuming that the firm uses a skimming strategy, we solve three profit maximization models, given demand that is linearly decreasing in price. Few prices can be used over the life of the product. The effects of both piracy and saturation are combined in the first model. In the second model, the firm can invest in technology or copyright enforcement to reduce piracy. The third model describes the case in which piracy leads to increased awareness of the product and increased demand. Numerical sensitivity analysis and examples are used to illustrate the results. The results indicate that under strong piracy and saturation effects, a skimming strategy is suboptimal.