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Competitive Pricing by a Price Leader

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Author Info

  • 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)

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    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.40.7.809
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 40 (1994)
    Issue (Month): 7 (July)
    Pages: 809-823

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    Handle: RePEc:inm:ormnsc:v:40:y:1994:i:7:p:809-823

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    Related research

    Keywords: marketing: competitive strategy; pricing; games: noncooperative; sequential;

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    Cited by:
    1. 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.
    2. 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.
    3. 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 Uni.
    4. 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.

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