Competition between incumbents and copycats under conspicuous consumption when consumers are strategic

Abstract

This paper examines the competition between incumbents and copycats in a market with consumers who exhibit both strategic purchasing behavior and conspicuous consumption behavior. To explore the interactive effects of these two types of behavior on the decision making of both firms, we develop a two-period model in which an incumbent sells a status product over two periods, and a copycat makes a market-entry decision and associated pricing strategy for the second period. All consumers have two types of utility, namely, intrinsic consumption utility and status utility. Our analysis suggests that it is optimal for the incumbent to adopt a high-price selling strategy in both periods when strategic consumers’ patience is higher than a particular threshold, and a low-price selling strategy otherwise. Interestingly, this threshold decreases with consumers’ sensitivity to status utility. Second, the copycat’s profit increase with strategic consumers’ patience, whereas higher patience will amplify the negative effects of status preference on the copycat’s profit. Finally, compared to the monopoly market situation, we show that an increase in consumers’ sensitivity to social status helps soften the competition and reduce the incumbent’s loss of profit.