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Dynamic Price Models for New-Product Planning

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  • Bruce Robinson

    (RCA Laboratories, Princeton, New Jersey)

  • Chet Lakhani

    (RCA Consumer Electronics, Indianapolis, Indiana)

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    Abstract

    The major points established in this paper are: classic marginal pricing is far from optimum for a rapidly evolving business; more appropriate dynamic models can be formulated if one has some feeling for the dominant evolutionary forces in the business environment; and, planning based on the dynamic models can lead to a significant improvement in the long run profit performance. Two developments in the management science literature, the experience curve phenomenon and market-penetration models, are used to illustrate the nature of the dynamic feedback between market and production activity which causes a new growth business to evolve. A specific illustrative example is offered which demonstrates the fact that dynamic price models can be used to test the long run consequences of specific pricing rules or to determine the optimum long run pricing scenario within the context of any constraints which a manager might wish to impose. As opposed to the conventional static theory which emphasizes the instantaneous profit flow, the dynamic models use an appropriately discounted accumulated profit as the major parameter for making value judgments. The specific example considered emphasizes the importance of these ideas for a growth market and suggests that dynamic models can lead to as much as an order of magnitude more profit in the long run than the conventional static theory. More modest, but significant, improvements in long run performance can be obtained in a moderate growth business.

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    File URL: http://dx.doi.org/10.1287/mnsc.21.10.1113
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 21 (1975)
    Issue (Month): 10 (June)
    Pages: 1113-1122

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    Handle: RePEc:inm:ormnsc:v:21:y:1975:i:10:p:1113-1122

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    Cited by:
    1. Hernández-Mireles, C. & Fok, D. & Franses, Ph.H.B.F., 2008. "The Triggers, Timing and Speed of New Product Price Landings," ERIM Report Series Research in Management ERS-2008-044-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Venkatesan, Rajkumar & Kumar, V., 2002. "A genetic algorithms approach to growth phase forecasting of wireless subscribers," International Journal of Forecasting, Elsevier, vol. 18(4), pages 625-646.
    3. Vardan Avagyan & Mercedes Esteban Bravo & Jose Vidal-Sanz, 2011. "Licensing radical product innovations to speed up the diffusion," Business Economics Working Papers wb113609, Universidad Carlos III, Departamento de Economía de la Empresa.
    4. Yan, Xiaoming & Liu, Ke, 2009. "Optimal control problems for a new product with word-of-mouth," International Journal of Production Economics, Elsevier, vol. 119(2), pages 402-414, June.
    5. Benchekroun, Hassan & Martín-Herrán, Guiomar & Taboubi, Sihem, 2009. "Could myopic pricing be a strategic choice in marketing channels? A game theoretic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1699-1718, September.
    6. Peters, Kay & Albers, Sönke & Kumar, V., 2008. "Is there more to international Diffusion than Culture? An investigation on the Role of Marketing and Industry Variables," EconStor Preprints 27678, ZBW - German National Library of Economics.
    7. Urban, Glen L. & Roberts, John H. & Hauser, John R., 1986. "Prelaunch forecasting of new automobiles : models and implementation," Working papers 1820-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Wilhelm, Wilbert E. & Xu, Kaihong, 2002. "Prescribing product upgrades, prices and production levels over time in a stochastic environment," European Journal of Operational Research, Elsevier, vol. 138(3), pages 601-621, May.
    9. Yi-Hui Chiang & Yiming Li & Chih-Young Hung, 2007. "A Dynamic Growth Model for Flows of Foreign Direct Investment," DEGIT Conference Papers c012_047, DEGIT, Dynamics, Economic Growth, and International Trade.
    10. Kim, Namwoon & Srivastava, Rajendra K., 2007. "Modeling cross-price effects on inter-category dynamics: The case of three computing platforms," Omega, Elsevier, vol. 35(3), pages 290-301, June.
    11. Crompton, Paul, 2001. "The diffusion of new steelmaking technology," Resources Policy, Elsevier, vol. 27(2), pages 87-95, June.
    12. Li, Georgi & Rajagopalan, S., 1998. "A learning curve model with knowledge depreciation," European Journal of Operational Research, Elsevier, vol. 105(1), pages 143-154, February.
    13. Ouardighi, Fouad El & Tapiero, Charles S., 1998. "Quality and the diffusion of innovations," European Journal of Operational Research, Elsevier, vol. 106(1), pages 31-38, April.
    14. Teng, Jinn-Tsair & Thompson, Gerald L., 1996. "Optimal strategies for general price-quality decision models of new products with learning production costs," European Journal of Operational Research, Elsevier, vol. 93(3), pages 476-489, September.
    15. Hassan Benchekroun & Guiomar Martín-Herrán, 2012. "Farsight and Myopia in a Transboundary Pollution Game," Cahiers de recherche 06-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    16. Alexander Frenzel Baudisch & Hariolf Grupp, 2006. "Evaluating the market potential of innovations: A structured survey of diffusion models," Jenaer Schriften zur Wirtschaftswissenschaft 21/2006, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät.
    17. Bhattacharjee, Sudip & Ramesh, R., 2000. "A multi-period profit maximizing model for retail supply chain management: An integration of demand and supply-side mechanisms," European Journal of Operational Research, Elsevier, vol. 122(3), pages 584-601, May.
    18. Jørgensen, Steffen & Kort, Peter M. & Zaccour, Georges, 2009. "Optimal pricing and advertising policies for an entertainment event," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 583-596, March.
    19. Wu, Chin-Chun & Lin, Pei-Chun & Chou, Chao-Yu, 2006. "Determination of price and warranty length for a normal lifetime distributed product," International Journal of Production Economics, Elsevier, vol. 102(1), pages 95-107, July.
    20. Rubel, Olivier, 2013. "Stochastic competitive entries and dynamic pricing," European Journal of Operational Research, Elsevier, vol. 231(2), pages 381-392.
    21. Lu, Jye-Chyi & Tsao, Yu-Chung & Charoensiriwath, Chayakrit & Dong, Ming, 2012. "Dynamic decision-making in a two-stage supply chain with repeated transactions," International Journal of Production Economics, Elsevier, vol. 137(2), pages 211-225.
    22. Dockner, Engelbert J. & Gaunersdorfer, Andrea, 1996. "Strategic new product pricing when demand obeys saturation effects," European Journal of Operational Research, Elsevier, vol. 90(3), pages 589-598, May.

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