Myopic and Far-Sighted Pricing Strategies in a Duopoly Market with e-WOM Effect

Abstract

ABSTRACTThis study focuses on how product substitutability, electronic word-of-mouth (e-WOM), and market size affect equilibrium myopic and far-sighted pricing strategies in a two-period duopoly market. The selling process of each firm consists of two periods. First-period sales influence second-period demand; thus, a firm must be myopic or far-sighted when making pricing decisions. This study derives and compares prices and profits with various strategy combinations and finds the following: (1) equilibrium strategies should be far-sighted–far-sighted (F–F) when product substitutability is low and myopic–myopic when product substitutability is high (either strategy is suitable when product substitutability is moderate, although an F–F equilibrium strategy may be accompanied by the prisoner’s dilemma); (2) the equilibrium strategy should be F–F as the e-WOM effect or second-period market size increases; and (3) with a far-sighted pricing strategy, the firm’s price and profit in the first period may be negative when the e-WOM effect is significant. This study establishes a theoretical framework to explore how the interaction between the e-WOM effect and market conditions affects equilibrium strategies of myopic and far-sighted pricing, especially considering a negative e-WOM effect. Results suggest that far-sighted pricing is not always an optimal equilibrium strategy; thus, the study provides start-ups with online guidelines to develop pricing strategies for market entry and expansion.