Multi-period pricing in the presence of competition and social influence

Abstract

This paper examines Single and Dynamic Pricing Policies of two competing firms over two periods in the presence of social influence. Assuming two firms adopt the same pricing policy, we find that, under either pricing policy, firm profits always decrease with the degree of social influence. Firms prefer Dynamic Pricing Policy when social influence is either relatively weak or sufficiently strong (for firms under Dynamic Pricing Policy to set zero prices in the first period). Otherwise, Single Pricing Policy is more preferable. The conclusions are similar when the market size varies over periods, except that Dynamic Pricing Policy is always more profitable if the market size in period 2 is sufficiently large. We have further compared the two pricing policies with Posted Pricing Policy. The results show that Dynamic Pricing Policy dominates when social influence is relatively weak, while Posted Pricing Policy dominates when social influence is sufficiently strong because of the synergy between social influence and the reference price effect. Finally, when each firm freely chooses either Single or Dynamic Pricing Policy, we find that, if the degree of social influence is relatively small, two asymmetric equilibria exist where two firms adopt different pricing policies. If the degree of social influence is very large, however, the unique equilibrium is both firms adopting Dynamic Pricing Policy. These findings provide important implications for firms to make more informed pricing decisions in an increasingly competitive environment with strong social influence.