Optimal pricing strategy under trade-in program in the presence of strategic consumers

Abstract

Many innovating firms use trade-in programs to encourage consumers’ repeat purchasing. They can choose between dynamic pricing and preannounced pricing strategies to mitigate the impacts of consumers’ strategic behavior. This paper develops a dynamic game framework to explore the optimal pricing strategy when the firm sequentially introduces new generations of products to a market populated by strategic consumers with trade-in option offered. Results show that under either pricing strategy, the firm has an incentive to sell the old generation products to new consumers in the second period if the salvage value of the old generation product is high enough. When consumers are sufficiently strategic, if both the innovation incremental value of the new generation product and the salvage value of the old generation product are low enough, the firm is better off following the preannounced pricing strategy. Besides, as the firm becomes more farsighted, the comparatively dominant position of preannounced pricing over dynamic pricing disappears gradually.