Competition with Variety Seeking and Habitual Consumption: Price Commitment or Quality Commitment?

Liyang Xiong,Guan Liu,Shi Jiang

doi:10.1155/2017/9845651

Abstract

This paper investigates price and quality competition in a market where consumers seek variety and habit formation. Variety seeking is modeled as a decrease in the willingness to pay for product purchased on the previous occasion while habitual consumption may increase future marginal utility. We compare two competing strategies: price commitment and quality commitment. With a three-stage Hotelling-type model, we show that variety seeking intensifies while habitual consumption softens the competition. With price commitment, firms supply lower quality levels in period 1 and higher quality levels in period 2, while, with quality commitment, firms charge higher prices in period 1 and lower prices in period 2. However, the habitual consumption brings the opposite effect. In addition, with quality commitment variety seeking leads to a lower profit and a higher consumer surplus, while habitual consumption leads to the opposite results. On the other side, with price commitment these behaviors have no effect on the consumer surplus, although they still lower down the firm profits. Finally, we also identify conditions under which one strategy outperforms the other.

Highlights

Future consumption could be influenced by present purchase experience in two important ways: variety seeking and habitual consumption
We model the habitual consumption as an increase in the willingness to pay for repetitive purchasing, this setting is different from that where Alejandro [18] models habit formation by assuming that in period 2 the consumers’ location will become closer to the firms’
Some empirical research of service competition can be seen in Bubalo and Gaggero [23] and Cheng et al [24], while, for consumers with habitual consumption, Alejandro [18] claims that habit formation increases product differentiation in location equilibrium

Summary

Introduction

Future consumption could be influenced by present purchase experience in two important ways: variety seeking and habitual consumption. Few papers have examined optimal firm strategies in the presence of variety seeking consumers (e.g., [11, 12]) or habitual consumption consumers (e.g., [13]). Sajeesh and Raju [11] study the pricing and positioning competition with variety seeking and Wei et al [12] study the combinatorial impact of variety and brand name value of the competing firms, while Baucells and Sarin [13] consider modification of the discounted utility model that accounts for both satiation and habit formation in intertemporal choice. The objective of this paper is to examine firms’ optimal decisions under two competing strategies: price commitment and quality commitment, in the presence of both variety seeking and habitual consumption behavior.

Literature Review

The Model

Analysis

Conclusion and Future Extensions