Dynamic Pricing under Cost Reduction in the Presence of Myopic and Strategic Consumers

Abstract

After release, a product usually suffers cost reductions during its whole lifespan. Compared to the myopic, strategic consumers may have stronger incentive to delay the purchase once they perceive that a significant cost reduction will result in a markdown. The strategic (compared to the myopic) properties influence the seller both quantitatively in terms of proportion of strategic consumers and qualitatively in terms of customer patience. To forecast the reaction of the whole market under cost reduction, it is necessary to acquire the strategic properties. In this paper, we study the impacts of proportion of strategic consumers, customer patience, and cost reduction on dynamic pricing strategy when cost reduction comes from technology advancement. The seller makes pricing strategies when facing unknown future cost, and the buyer makes purchase decisions when facing unknown future price. Our study shows that generally both higher strategic consumer proportion and customer patience contribute to a delay in sales. Further, profit diversion happens under great combination of strategic properties. In addition, with the increase of customer patience, not only strategic but also myopic consumers will buy less. Finally, the strategic properties moderate the pricing strategy in latter stage when there is a cost reduction. This indicates a threshold as combination of strategic properties, upon which seller tends to offer a smaller markdown to discourage strategic waiting, and under which seller tends to offer a greater markdown to divert strategic consumers to the latter period.

Dynamic Contract Design of Product‐Service Supply Chain considering Consumers’ Strategic Behavior and Service Quality

“…Du and Chen take into account the uncertainty of the number of strategic consumers and the uncertainty of product evaluation in the market, studying the pricing strategy of new product, finding that the applicable conditions of the two pricing strategies of skimming pricing and penetration pricing [18]. Some scholars separately study the impact of consumers' strategic behavior on pricing in different situations such as product demand learning [19], quality information disclosure [20], cost reduction [21], reference price effects [22,23], e-commerce platforms [24], and two alternative products (low-carbon products and ordinary products) [25].…”