Article ID: | iaor20112192 |
Volume: | 57 |
Issue: | 2 |
Start Page Number: | 347 |
End Page Number: | 362 |
Publication Date: | Feb 2011 |
Journal: | Management Science |
Authors: | Savaskan R Canan, Shulman Jeffrey D, Coughlan Anne T |
Keywords: | economic equilibria, pricing, duopoly, restocking |
This paper investigates the pricing and restocking fee decisions of two competing firms selling horizontally differentiated products. We model a duopoly facing consumers who have heterogeneous tastes for the products and who must experience a product before knowing how well it matches with their preferences. The analysis yields several key insights. Restocking fees not only can be sustained in a competitive environment, but also are more severe when consumers are less informed about product fit and when consumers place a greater importance on how well products' attributes fit with their preferences. We compare the competitive equilibrium prices to a scenario in which consumers are certain about their preferences and find conditions defining when consumer uncertainty results in higher equilibrium prices. Comparison to a monopoly setting yields a surprising result: Equilibrium restocking fees in a competitive environment can be higher than those charged by a monopolist.