Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation

Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation

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Article ID: iaor2013508
Volume: 59
Issue: 1
Start Page Number: 84
End Page Number: 101
Publication Date: Jan 2013
Journal: Management Science
Authors: ,
Keywords: operations management, pricing
Abstract:

We consider dynamic pricing competition between two firms offering vertically differentiated products to strategic customers who are intertemporal utility maximizers. We show that price skimming arises as the unique pure‐strategy Markov perfect equilibrium in the game under a simple condition. Our results highlight the asymmetric effect of strategic customer behavior on quality‐differentiated firms. Even though the profit of either firm decreases as customers become more strategic, the low‐quality firm suffers substantially more than the high‐quality firm. Furthermore, we show that unilateral commitment to static pricing by either firm generally improves profits of both firms. Interestingly, both firms enjoy higher profit lifts when the high‐quality firm commits rather than when the low‐quality firm commits.

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