The dynamic pricing of next generation consumer durables

The dynamic pricing of next generation consumer durables

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Article ID: iaor1993494
Country: United States
Volume: 11
Issue: 3
Start Page Number: 251
End Page Number: 265
Publication Date: Jun 1992
Journal: Marketing Science
Authors:
Keywords: numerical analysis, statistics: empirical, manufacturing industries
Abstract:

Learning curve effects, aspects of consumer demand models (e.g., reservation price distributions, intertemporal utility maximizing behavior), and competitive activity are reasons which have been offered to explain why prices of new durables decline over time. This paper presents an alternative rationale based on the buying behavior for products with overlapping replacement cycles (i.e., next generation products). A model for consumer sales of a new durable is developed by incorporating the replacement behavior of a previous generation product. Pricing strategies for two product generations are investigated analytically and with numerical methods. Results indicate that durable replacement behavior leads to a wider set of optimal pricing strategies than previously obtained. Several empirical illustrations of industry pricing practices for successive product generations are also shown to be consistent wih the theoretical results. Finally, various areas for future research are outlined.

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