The Impact of Competitive Entry in a Developing Market Upon Dynamic Pricing Strategies

Abstract

This paper analyzes dynamic pricing strategies for new durable goods in a two-period context. The first period is characterized as a monopoly market structure for a new product having dynamic demand. The second period begins when a new firm enters the market, and thereby changes the market structure to a duopolistic one. We begin by analyzing the pricing strategies of three types of monopolists: nonmyopic, myopic and “surprised.” A nonmyopic monopolist is a first entrant who perfectly predicts the competitive entry. A myopic monopolist totally discounts the duopolistic period, and a “surprised” monopolist is a first entrant who has the longer time horizon of the nonmyopic monopolist, but who does not foresee the competitive entry. Our results indicate that the nature of these pricing strategies may be quite different. It is optimal for the nonmyopic firm to price its product at a higher level than the myopic monopolist. Additional results indicate under what circumstances the “surprised” monopolist will price too high during the monopoly period. The intuition behind these results is the fact that the myopic monopolist competition while the surprised monopolist it. We also characterize the nature of the dynamic equilibrium prices that will prevail during the competitive period. For example, we show that products having higher prices (because of differences) will exhibit a more rapid rate of price decline. Moreover, a in the first entrant's pricing strategy, as a response to a second entry—which is often observed in the market place—is also captured by our model. Because these analyses are limited to situations where the time of second entry is predictable, a scenario that fits our model better would be the health-care equipment industry where a specified period of government observation and/or testing is required. Immediate extensions of our model should include a discount factor and learning effects on both costs and demand.new product competition, market saturation, entry deterrence, dynamic pricing

Game Theory in Supply Chain Analysis

“…Hence, when differentiating the Hamiltonian to obtain Equations (13) and (14), we have to account for such dependence (note also that two terms disappear when we use (12) to simplify). As we mentioned earlier, there are numerous applications of differential games in economics and marketing, especially in the area of dynamic pricing, see Eliashberg and Jeuland [32]. Desai [30,31] and Eliashberg and Steinberg [33] use the open-loop Stackelberg equilibrium concept in a marketing-production game with the manufacturer and the distributor.…”

Game Theory in Supply Chain Analysis

“…As we mentioned earlier, there are numerous applications of differential games in economics and marketing, especially in the area of dynamic pricing, see, e.g., Eliashberg and Jeuland (1986). Eliashberg and Steinberg (1987), Desai (1992) and Desai (1996) use the open-loop Stackelberg equilibrium concept in a marketing-production game with the manufacturer and the distributor.…”

Competition under time‐varying demands and dynamic lot sizing costs

“…Based on (14) and (15), Figure 2 exhibits the optimal profit π * 1 (n) for pattern At the price vector p = {30, 30, 30}, this set of demand functions has the same direct price We, again, address the best response problem firm 1 faces when both of his competitors choose a price of $30 and K = 5000. Based on (18), Figure 3 again exhibits the optimal profit π * i (n) for patterns (I) and (VI), as a function of the permitted number of orders n. Under pattern (I) ((VI)), the optimal price is $40.83 ($39.63) and the optimal number of orders 20 (18).…”

“…no inventories are carried. These papers include Kalish (1983), Eliashberg and Jeuland (1986), Clarke and Dolan (1984), Rao and Bass (1985), and Dockner and Jorgensen (1988). See Elmaghraby and Keskinocak (2003) for a survey.…”