First-period Price Research Articles

Counterfeit Competition With Strategic Consumers

This article investigates competition between a branded firm selling a durable good over two periods and a deceptive counterfeiter entering the market in the second period. The two firms engage in a price signaling game in which the branded firm designs its price strategy over two periods, and strategic consumers decide whether to buy the authentic product upfront or wait until the second period. We find that the branded firm may benefit from the counterfeit competition if the quality gap between the two products is sufficiently large. The intuition is that the branded firm would charge a high second-period price to signal its authenticity, inducing more consumers to buy the genuine product upfront. This strategy allows the branded firm to increase its first-period price and demand simultaneously, thus effectively mitigating the time-inconsistency problem. Otherwise, when the quality gap is small, counterfeit competition leads to reduced profits for the authentic product. These results remain robust throughout several extensions of the base model, including partially informed or naive consumers, asymmetric retail channels, post-purchase regret, and endogenized counterfeit.

On Point Predictions and Reference Dependence in Behavior-Based Pricing Experiments


 
 
 It has been shown that the comparative static results of two-period behavior-based pricing models hold in laboratory experiments, while point predictions do not. This study aims to check whether these findings replicate and to evaluate why observed prices deviate from point predictions. We report observed prices in conformity with point predictions through: (1.) a uniform pricing benchmark, (2.) a replication of a behavior-based pricing experiment, and (3.) a follow-up experiment in which we consider the second period disjointed from the first period. By disjoining the two periods, we show that reference dependence toward first-period prices shifts the second-period pricing behavior of participants upwards. In a post hoc analysis, we show that considering consumers' myopic instead of strategic explains a downward shift in first-period prices and rationalizes prior experimental findings. Volatile price levels affect price-based welfare measures – such as seller profits and total customer costs. We show that transport costs are a robust welfare measure that alleviates the impact of distorted prices. Ultimately, our findings are relevant for the design and assessment of multi-period pricing experiments.
 
 

Optimal two-period pricing strategies in a dual-channel supply chain considering market change

This paper considers a dual-channel supply chain consisting of one manufacturer with an online direct channel and one offline retailer who distributes the manufacturer’s products, both of whom may adopt a Different or Same price strategy over two periods (Strategy D or S). Strategy D(S) means that the manufacturer and retailer set different(same) retail prices for online and offline channels in the two sales periods. The main purposes of this research are to identify the manufacturer’s and the retailer’s optimal two-period pricing strategy and explore how consumers’ channel preference, price competition, and market change affect the strategy equilibrium. We derive and compare the equilibrium outcomes by establishing four game models: (1) Model SS, both the manufacturer and retailer adopt Strategy S; (2) Model SD, the manufacturer chooses Strategy S while the retailer selects Strategy D; (3) Model DS, the manufacturer chooses Strategy D while the retailer selects Strategy S; (4) Model DD, both choose Strategy D. The research findings demonstrate that most prices increase as the market change rate raises, except for the first-period prices under Model DD, which remain unchanged. Under the different prices settings, a shrinking market would impel supply chain members to utilize a skimming pricing strategy, while a growing market drives them to select a penetration pricing strategy. Different from traditional wisdom, Strategy D would always benefit the manufacturer, while it may hurt the retailer and the whole supply chain under certain conditions. Accordingly, either Strategy DS or DD may be the Nash equilibrium. After considering the consumers’ channel switching behavior, the retailer has more incentive to adopt Strategy S in a shrinking market.

An integrative framework of cooperative advertising with reference price effects

The importance of reference price effects in consumer behavior and marketing decisions is now well established in the literature. However, research on the impact of these effects on cooperative advertising decisions in marketing channels remains very limited. A two-period model is developed to analyze how members of a bilateral monopoly channel should set pricing and advertising decisions in a context where first-period price serves as the reference price of second period. By solving a Stackelberg game where the manufacturer is the leader, nine feasible equilibria are endogenously obtained. These equilibria correspond to different combinations (scenarios) of the respective decisions of the retailer and manufacturer to undertake or not and to support or not local advertising in each period. The profitability of each of these scenarios for the players and their pricing and advertising strategies over time depend, among others, on how sensitive consumers are to price changes over time.

When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model

This paper investigates duopoly competition when horizontally differentiated firms are able to make personalized product-price offers to returning customers, within a behavior-based discrimination model. In the second period, firms can profile old customers according to their preferences, selling them targeted products at personalized prices. Product-price personalization (PP) allows firms to retain all old customers, eliminating second-period customer poaching. The overall profit effects of PP are shown to be ambiguous. In the second period, PP improves the matching between customers’ preferences and firms’ offers, but firms do not make any revenues in the rival’s turf. In the Bertrand outcome, second-period profits only increase for both firms if the size of their old turfs are not too different or initial products are not too differentiated. However, the additional second-period profits may be offset by lower first-period profits. PP is likely to increase firms’ overall discounted profits when consumers’ (firms’) discount factor is low (high) and firms’ initial products are exogenous and sufficiently different. When the location of initial products is endogenous, profits are hurt because of an additional location (strategic) effect aggravating head-to-head competition in the first period. Likewise, when a fraction of active consumers conceals their identity, PP increases second-period profits at the cost of aggressive first-period price competition. Finally, we show that the room for profitable PP enlarges considerably if firms rely on PP as an effective device to sustain tacit collusive outcomes, with firms credibly threatening to respond to first-period price deviations with second-period aggressive relocations of their standard products. This paper was accepted by Matthew Shum, marketing. Funding: D. Laussel gratefully acknowledges support by the French National Research Agency [Grant ANR-17-EURE-0020] and the Excellence Initiative of Aix-Marseille University [Grant A*MIDEX]. J. Resende was supported by Portuguese public funds [Project Reference NORTE-01-0145-FEDER-028540] and through FCT (Fundação para a Ciência e a Tecnologia) [Project Reference POCI-01-0145-FEDER-006890]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4298 .

Decisions and coordination of retailer-led fresh produce supply chain under two-period dynamic pricing and portfolio contracts

Fresh agricultural produce is almost the staple food and necessity of people’s daily diet all over the world. However, natural perishability and freshness affect the demand for fresh agricultural produce. Due to the change of freshness, the retailer has to adopt a multi-period dynamic pricing strategy to deal with unsold products. The research object of this paper is the retailer’s two-echelon supply chain of fresh agricultural produce, and the aim is to achieve the optimal two-period coordination and ordering through options and wholesale contracts in the supply chain. In the case of two-period pricing, we find that the optimal wholesale order quantity increases with the decline of the price in the first period and tends to be stable with the decline of the price in the second period. In contrast, the price change in the first period has a greater impact on the retailer’s optimal order quantity. The profits of both the retailer and the supplier increase significantly with the increase of the price in the first period, while the impact of the change of the price in the second period is not obvious. Meanwhile, decentralized decision-making can only be coordinated in the supply chain through the original option contract at the first-period price. In the second period, the cost-sharing contract is introduced to coordinate the supply chain, increase orders, and increase the profits of both the retailer and the supplier. These findings are of great significance for both the retailer and the supplier in the multi-period dynamic pricing of fresh produce under the option contract.

Selling multiple units to strategic consumers

We consider a monopolist firm selling to strategic customers who may purchase more than one unit of a product in a two-period model. We provide closed-form solutions for the firm’s optimal prices and show that they are non-monotonic in both the value of the second unit and the strategic level of customers. Particularly, the first-period price can increase as customers become more strategic, in contrast to the single-unit setting where it always decreases in the strategic level of customers.

Ratings, Reviews, and the Marketing of New Products

We study how user-generated content (UGC) about new products impacts a firm's advertising and pricing decisions and the effect on profits and market dynamics. We construct a two-period model where consumers value quality and are heterogeneous in their taste for the new product's positioning and examine three information-transfer structures across generations: no information (benchmark), average rating (AR), and the joint distribution of ratings and taste locations (reviews). First, we show that in the AR case, the firm advertises to a smaller set of consumers and prices higher relative to the other cases. This occurs because the firm has an incentive to use advertising strategically to bump up the first-generation average rating in order to increase second-generation quality perceptions. The firm charges a higher first-period price as consumers who are relatively close to the product's location are advertised to. Second, we find that as more information is transferred across generations, there is a greater likelihood that average ratings will exhibit an increasing pattern over time. This happens because with reviews, second-generation consumers are able to base purchase decisions on the product's positioning in addition to its quality. Interestingly, because of the firm's narrower advertising strategy in the AR case and the richer UGC in the reviews case, average ratings will exhibit a reversal over time: higher in the AR case in the first period but higher in the reviews case in the second period. Third, a firm's expected profits can exhibit a nonmonotonic relationship with respect to the amount of UGC transferred: highest in the AR case if the marginal return on advertising is high (e.g., when advertising is cheap to execute, consumers are insensitive to product fit or consumers greatly value quality) but highest in the reviews case when the return on advertising is low. We then examine a setup whereby second-generation consumers become aware of the product through social interaction with first-generation buyers. We find that advertising and social contagion interact: the firm generally has a greater incentive to advertise as homophily increases, that is, as social interactions occur between consumers who more likely share similar preferences. However, this pattern can reverse with reviews. This paper discusses several robustness checks and model extensions and concludes by highlighting the managerial implications of the results. This paper was accepted by Matthew Shum, marketing.

Strategic pricing under quality signaling and imitation behaviors in supply chains

We consider a firm producing and selling experience products over two periods with private quality information. Consumers strategically decide their purchasing timing driven by the imitation effect, and the firm chooses pricing policy (dynamic or preannounced) and equilibrium type (separating or pooling, through which true quality information is revealed). Results imply that the firm prefers preannounced pricing but consumers prefer dynamic pricing. Under both pricing schemes, the first-period price decreases but the second-period price increases with the imitation effect. A pooling-pooling equilibrium is always preferred, unless the firm is farsighted and the imitation effect is weak under dynamic pricing.

Selling Multiple Units to Strategic Customers

We consider a monopolist firm selling to strategic customers who may purchase more than one unit of a product in a two-period model. We provide closed-form solutions for the firm’s optimal prices and show that they are non-monotonic in both the value of the second unit and the strategic level of customers. Particularly, the first-period price can increase as customers become more strategic, in contrast to the single-unit setting where it always decreases in the strategic level of customers.

Transparency of Behavior-Based Pricing

Behavior-based pricing (BBP) refers to the practice in which firms collect consumers’ purchase history data, recognize repeat and new consumers from the data, and offer them different prices. This is a prevalent practice for firms and a worldwide concern for consumers. Extant research has examined BBP under the assumption that consumers observe firms’ practice of BBP. However, consumers do not know that specific firms are doing this and are often unaware of how firms collect and use their data. In this article, the authors examine (1) how firms make BBP decisions when consumers do not observe whether firms perform BBP and (2) how the transparency of firms’ BBP practice affects firms and consumers. They find that when consumers do not observe firms’ practice of BBP and the cost of implementing BBP is low, a firm indeed practices BBP, even though BBP is a dominated strategy when consumers observe it. When the cost is moderate, the firm does not use BBP; however, it must distort its first-period price downward to signal and convince consumers of its choice. A high cost of implementing BBP serves as a commitment device that the firm will forfeit BBP, thereby improving firm profit. By comparing regimes in which consumers do and do not observe a firm’s practice of BBP, the authors find that transparency of BBP increases firm profit but decreases consumer surplus and social welfare. Therefore, requiring firms to disclose collection and usage of consumer data could hurt consumers and lead to unintended consequences.

Signaling Quality in the Presence of Observational Learning

We study the optimal pricing strategy for a privately informed monopolist in the presence of observational learning. Early adopters learn quality before purchasing the product. Late adopters learn quality from first-period price and early adopters’ purchase decisions. Prices generate revenues, signal quality, and determine information transmission through observational learning. Separation may occur through either high or low prices, depending on the elasticity of early adopters’ demand. When demand for good-quality products is less elastic, high prices are less costly for high-type firms due to static and dynamic effects. High-type firms are marginally less affected by high prices, since they lose fewer consumers. Moreover, early sales at higher prices carry good news about quality to late adopters. The opposite occurs when the demand for good-quality products is more elastic.

Transparency of Behavior-Based Pricing

Behavior-based pricing (BBP) refers to the practice in which firms collect consumers' purchase history data, recognize repeat and new consumers from the data, and offer them different prices. BBP is a prevalent practice for firms and a worldwide concern for consumers. Extant research has examined BBP under the assumption that consumers observe firms' practice of BBP. However, consumers do not know this for specific firms and are often unaware of how firms collect and use their data. In this paper, we examine how firms make BBP decisions when consumers do not observe whether firms perform BBP and how the transparency of firms' BBP practice affects firms and consumers. We find that when consumers do not observe firms' practice of BBP and the cost of implementing BBP is low, a firm indeed practices BBP, even though BBP is a dominated strategy when consumers observe it. When the cost is moderate, the firm does not use BBP; however, it must distort its first-period price downward to signal and convince consumers of its choice. A high cost of implementing BBP serves as a commitment device that the firm will forfeit BBP, thereby improving firm profit. By comparing regimes in which consumers observe and do not observe a firm's practice of BBP, we find that transparency of BBP increases firm profit but decreases consumer surplus and social welfare. Therefore, commanding firms to disclose collection and usage of consumer data could hurt consumers and lead to unintended consequences.

Coordinating pricing and advertising in a two-period fashion supply chain

Firms in the fashion industry frequently launch new styles of their products, thereby leading to a ‘two-period’ phenomenon in product sales: the normal selling time and the last salvage time. Researches about cooperative (co-op) advertising, however, seldom concentrate on this phenomenon. This study explores co-op advertising in a two-period fashion supply chain system in which the retailer offers a price discount in the second period. We derive the optimal pricing, product design level and advertising efforts in two scenarios: a decentralised scenario with a co-op advertising program and integrated scenario. Additionally, we propose a bilateral participation-revenue-sharing contract to coordinate this channel. Some insights and management implications are obtained. Firstly, if the consumers are insensitive to the first-period price, the retailer will set a high retail price in this period, while selling the product at a big discount in the second period to stimulate extra consumption. Secondly, if the price elasticity of demand is small, the retailer will spend more on the advertisement, otherwise the condition is opposite. Lastly, this study verifies that the bilateral participation-revenue-sharing contract can achieve a seamless coordination in this supply chain with a transfer payment.

Consumer Fairness Concerns and Dynamic Pricing in a Channel

The extant literature has well documented consumers’ fairness concerns. For example, when a firm charges a higher price than what’s considered fair (a reference point), some consumers may experience some psychological disutility when buying from the firm. This paper studies a channel where the retailer faces a segment of consumers who have fairness concerns about retail price increases. We analyze a growing market where, in each of the two periods, the manufacturer sells its product at a wholesale price to the retailer, which chooses its retail prices dynamically. However, if the retailer raises its second-period price, the second-period demand will experience a drop in the segment of consumers with fairness concerns. Our analysis reveals several interesting findings. First, the presence of consumers with fairness concerns tends to make the manufacturer increase its first-period wholesale price and reduce its second-period wholesale price. Second, the presence of consumers with fairness concerns can in equilibrium reduce both the first-period and second-period retail prices. Third, an increase in the market growth rate can lead to a decrease in retail and wholesale prices in both periods. Fourth, consumer fairness concerns can result in an all-win situation for the manufacturer, the retailer, and the consumers. The existence of a segment of consumers with fairness concerns can allow the retailer to lower its first-period price, which in essence helps the retailer to commit to not significantly raising its second-period price, which in turn gives the manufacturer an incentive to lower its second-period wholesale price, making pricing in the channel more efficient.

Behavior-Based Quality Discrimination

New technology enables firms to recognize customers from their purchase histories and then provide different quality levels of product features or services for repeat and new customers. Extant research has examined behavior-based price discrimination (BBP), that is, how firms set different prices for repeat and new customers. This research extends the literature by investigating behavior-based quality discrimination to reveal the unique effects of quality discrimination beyond the effects of BBP. Using a two-period game-theoretic model, we find that firms reward repeat customers on the quality dimension by offering them higher-quality product features or service than what new customers receive. Such quality discrimination dissuades competitive poaching, softens second-period price competition, and increases second-period profits. Meanwhile, firms reward new customers on the price dimension by offering them a lower price than what repeat customers pay. Therefore, firms should reward different types of customers with the right attribute (i.e., product features or services versus price). In addition, quality discrimination increases customer retention in the second period. Anticipating this outcome, forward-looking firms reduce first-period prices to compete aggressively for initial customers. This effect intensifies first-period competition and reduces first-period profits. Overall, behavior-based quality discrimination decreases firms' total profits but increases consumer surplus and social welfare.

Ratings, Reviews, and the Marketing of New Products

We study how user-generated content (UGC) about new products impacts a firm’s advertising and pricing decisions as well as the effect on profits and market dynamics. We construct a two-period model, where consumers value quality and are heterogeneous in their taste for the new product’s positioning, and examine three information transfer structures across generations: no information (Benchmark); average rating (AR); and the joint distribution of ratings and taste locations (Reviews). First, we show that in the AR case the firm advertises to a smaller set of consumers and prices higher relative to the other cases. This occurs because the firm has an incentive to use advertising strategically to bump up the first-generation average rating in order to increase second-generation quality perceptions. The firm charges a higher first-period price as consumers who are relatively close to the product’s location are advertised to. Second, we find that as more information is transferred across generations there is a greater likelihood that average ratings will exhibit an increasing pattern over time. This happens because with Reviews second-generation consumers are able to base purchase decisions on the product’s positioning in addition to its quality. Interestingly, due to the firm’s narrower advertising strategy in the AR case and the richer UGC in the Reviews case, average ratings will exhibit a reversal over time: higher in the AR case in the first period but higher in the Reviews case in the second period. Third, a firm’s expected profits can exhibit a non-monotonic relationship with respect to the amount of UGC transferred: highest in the AR case if the marginal return on advertising is high (e.g., when advertising is cheap to execute, consumers are insensitive to product fit, or consumers greatly value quality), but highest in the Reviews case when the return on advertising is low. We then examine a setup whereby second-generation consumers become aware of the product through social interaction with first-generation buyers. We find that advertising and social contagion interact - the firm generally has a greater incentive to advertise as homophily increases, i.e., as social interactions occur between consumers who more likely share similar preferences. However, this pattern can reverse with Reviews. The paper discusses several robustness checks and model extensions, and concludes by highlighting the managerial implications of the results.

A dynamic monopoly with risk-averse consumers

I study the dynamically optimal pricing strategy of a forward-looking monopolist that introduces a novel product when facing a normalized population of risk-averse, non-strategic consumers. The product can be seen as an experience good in the first period. How well the product fits the consumers’ taste is learned only after experimentation, allowing for signaling in the second period. I find that the larger the degree of risk aversion, the higher the probability of observing an introductory price. Moreover, after the realization of a relatively poor fit between the product and the consumers’ taste, an introductory price is optimal from an ex-post perspective. Finally, a first-period price ceiling leads to a strictly larger level of welfare if and only if consumers are moderately risk averse.

A Dynamic Network Game for the Adoption of New Technologies

When a new product or technology is introduced, potential consumers can learn its quality by trying the product, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when gents are connected by a network and a monopolist seller chooses a policy to maximize profits. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives - rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a `double-threshold strategy' by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination (i.e., a first-period price discount) is optimal on others, and discuss welfare implications.

Low prices cum selective distribution versus high prices: how best to signal quality?

ABSTRACTWe investigate the best signalling strategy for a monopoly introducing a new product with unobservable quality when second-period sales are linked to first-period ones and the firm may tailor its distribution network to exclude some consumers. When producing a high quality product rather than a low quality one is relatively costly with respect to the increase in quality, optimal signalling is by price alone. But when the cost differential is lower, it will be optimal to set a low first-period price, not to serve all would-be consumers at this price (selective distribution) and raise the price afterwards. Paradoxically, this strategy allows a larger customer base to be reached than in the case of pure price signalling.