Introductory pricing, market development and profit sharing

Abstract

This article investigates how channel members collaboratively implement introductory pricing strategy to develop a market for an innovative product. The overall market demand of the innovative product depends on the initial sales to pioneer consumers. When the potential market size is large, the manufacturer sets a high wholesale price and shares no profit with the retailer. The retailer is motivated by the large market potential, and therefore, is willing to develop the market by charging pioneers a low retail price. The retailer subsequently benefits from market development by increasing its price selling to the rest of the market. When the potential market size is moderate, the manufacturer lowers the wholesale price and shares a positive profit with the retailer. Hence, the manufacturer provides incentives for the retailer to charge a low retail price to develop the market, rather than a high retail price to capitalize on pioneer consumers only. Further, this article shows that, when the retailer is myopic, the manufacturer has to yield more profits in order to development the market to the retailer than in the case when the retailer is forward-looking.