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Competitive Pricing by a Price Leader

Author

Listed:
  • Abhik Roy

    (The A. Gary Anderson Graduate School of Management, University of California, Riverside, California 92521)

  • Dominique M. Hanssens

    (The John E. Anderson Graduate School of Management, University of California, Los Angeles, California 90024)

  • Jagmohan S. Raju

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

We examine the problem of pricing in a market where one brand acts as a price leader. We develop a procedure to estimate a leader's price rule, which is optimal given a sales target objective, and allows for the inclusion of demand forecasts. We illustrate our estimation procedure by calibrating this optimal price rule for both the leader and the follower using data on past sales and prices from the mid-size sedan segment of the U.S. automobile market. Our results suggest that a leader-follower system (Stackelberg) seems more consistent with the pricing behavior in this market, than a mutually independent pricing rule (Nash). We also find that our optimal price rule explains this market data better than other pricing schemes that do not account for optimizing behavior on the part of the leader and the follower.

Suggested Citation

  • Abhik Roy & Dominique M. Hanssens & Jagmohan S. Raju, 1994. "Competitive Pricing by a Price Leader," Management Science, INFORMS, vol. 40(7), pages 809-823, July.
    • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:7:p:809-823
    DOI: 10.1287/mnsc.40.7.809
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    Citations

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    Cited by:

    1. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.
    2. K. Sudhir & Pradeep K. Chintagunta & Vrinda Kadiyali, 2005. "Time-Varying Competition," Marketing Science, INFORMS, vol. 24(1), pages 96-109, September.
    3. Vincent R. Nijs & Marnik G. Dekimpe & Jan-Benedict E.M. Steenkamps & Dominique M. Hanssens, 2001. "The Category-Demand Effects of Price Promotions," Marketing Science, INFORMS, vol. 20(1), pages 1-22, September.
    4. Venkatesh Shankar, 2006. "Proactive and Reactive Product Line Strategies: Asymmetries Between Market Leaders and Followers," Management Science, INFORMS, vol. 52(2), pages 276-292, February.
    5. Jagmohan S. Raju & Abhik Roy, 2000. "Market Information and Firm Performance," Management Science, INFORMS, vol. 46(8), pages 1075-1084, August.
    6. Abhik Roy, 2022. "A dynamic model of price competition and promotion in prescription drug markets," Marketing Letters, Springer, vol. 33(4), pages 577-591, December.
    7. Arenoe, Bjorn & van der Rest, Jean-Pierre I. & Kattuman, Paul, 2015. "Game theoretic pricing models in hotel revenue management: An equilibrium choice-based conjoint analysis approach," Tourism Management, Elsevier, vol. 51(C), pages 96-102.
    8. Morris A. Cohen & Jehoshua Eliashberg & Teck H. Ho, 2000. "An Analysis of Several New Product Performance Metrics," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 337-349, July.
    9. Michel Wedel & Jie Zhang & Fred Feinberg, 2015. "Implementing Retail Category Management: a Model-Based Approach to Setting Optimal Markups," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(2), pages 165-176, June.
    10. 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.
    11. Abhik Roy & Jagmohan Raju, 2011. "The influence of demand factors on dynamic competitive pricing strategy: An empirical study," Marketing Letters, Springer, vol. 22(3), pages 259-281, September.
    12. Jean-Pierre Dubé & Puneet Manchanda, 2005. "Differences in Dynamic Brand Competition Across Markets: An Empirical Analysis," Marketing Science, INFORMS, vol. 24(1), pages 81-95, September.
    13. Kopp, Thomas, 2017. "Bertrand Competition in Oligopsonistic Market Structures - the Case of the Indonesian Rubber Processing Sector," 57th Annual Conference, Weihenstephan, Germany, September 13-15, 2017 261980, German Association of Agricultural Economists (GEWISOLA).
    14. K. Sudhir, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Marketing Science, INFORMS, vol. 20(3), pages 244-264, October.
    15. Fruchter, Gila E. & Messinger, Paul R., 2003. "Optimal management of fringe entry over time," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 445-466, December.
    16. Naufel J. Vilcassim & Vrinda Kadiyali & Pradeep K. Chintagunta, 1999. "Investigating Dynamic Multifirm Market Interactions in Price and Advertising," Management Science, INFORMS, vol. 45(4), pages 499-518, April.
    17. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
    18. Cleeren, K. & Dekimpe, M.G. & Verboven, F., 2005. "Intra- and Inter-Channel Competition in Local-Service Sectors," ERIM Report Series Research in Management ERS-2005-018-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.
    19. Li, Xue-yan & Li, Xue-mei & Li, Xue-wei & Qiu, He-ting, 2017. "Multi-agent fare optimization model of two modes problem and its analysis based on edge of chaos," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 405-419.
    20. Scott M. Gilpatric & Youping Li, 2021. "Endogenous Price Leadership and Product Positioning," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(2), pages 287-302, March.
    21. Putsis, William P., Jr., 1998. "Empirical Analysis of Competitive Interaction in Food Product Categories," Research Reports 25221, University of Connecticut, Food Marketing Policy Center.

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