Pricing competition on innovative product between innovator and entrant imitator facing strategic customers

Abstract

When an innovative product is introduced into the market, innovators always face competition from entrant imitators. Strategic customers may also anticipate this and can design their purchase plans accordingly. In this study, we develop a dynamic game model to formulate the problem associated with competitive product pricing between an innovator and an imitator for obtaining a pricing equilibrium. The influence of various factors on pricing policies, market sales and profits are analysed. We argue that when anticipating forthcoming competitors, innovators should not price too highly in the monopoly stage. The optimal monopoly price decreases with the quality ratio and forms a U shape along with the dimension of customers’ strategic level; however, the right tail of the U is mitigated when the quality ratio increases. In the duopoly phase, the markdown for the innovator and the difference in product cost performance between the innovator and imitator are investigated. We then analyse the value of demand information. The numerical analysis indicates that the value decreases with customers’ strategic level and increases with the quality ratio. The revealing behaviour of the innovator influences the imitator marginally in pricing and considerably in profit. Finally, a medium level is always preferred when the imitator chooses the product quality level.