Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation

Qian Liu () and Dan Zhang ()
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Qian Liu: Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Dan Zhang: Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309

Management Science, 2013, vol. 59, issue 1, 84-101

Abstract: We consider dynamic pricing competition between two firms offering vertically differentiated products to strategic customers who are intertemporal utility maximizers. We show that price skimming arises as the unique pure-strategy Markov perfect equilibrium in the game under a simple condition. Our results highlight the asymmetric effect of strategic customer behavior on quality-differentiated firms. Even though the profit of either firm decreases as customers become more strategic, the low-quality firm suffers substantially more than the high-quality firm. Furthermore, we show that unilateral commitment to static pricing by either firm generally improves profits of both firms. Interestingly, both firms enjoy higher profit lifts when the high-quality firm commits rather than when the low-quality firm commits. This paper was accepted by Yossi Aviv, operations management.

Keywords: dynamic pricing; pricing competition; strategic customers; vertical differentiation (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (71)

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