IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v257y2017i1d10.1007_s10479-014-1717-0.html
   My bibliography  Save this article

Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers

Author

Listed:
  • Peng Du

    (Nankai University)

  • Qiushuang Chen

    (Nankai University)

Abstract

Pricing for new products is usually a difficult task for a firm, for there always exists uncertainty of consumers’ valuation with respect to the new products. Moreover, the presence of strategic consumers even complicates the situation, due to their inter-temporal purchase choice behavior and their uncertain proportion in the whole demand pool. In this paper, facing the twofold uncertainty, we develop a stylized model to study the optimal pricing for new fashion products in the presence of strategic consumers. The optimal pricing strategy for the firm and the optimal purchase timing for strategic consumers are obtained; a framework is also built to investigate the expected value of demand information. Through numerical studies, we find that the price skimming strategy dominates the penetration strategy only when the firm’s discount factor is large enough, consumers’ strategic purchasing behavior diminishes the firm’s ability to adopt skim pricing, and the revealing strategy is most valuable when the firm is (almost) indifferent between skimming and penetration. In addition, some other managerial insights are also derived.

Suggested Citation

  • Peng Du & Qiushuang Chen, 2017. "Skimming or penetration: optimal pricing of new fashion products in the presence of strategic consumers," Annals of Operations Research, Springer, vol. 257(1), pages 275-295, October.
    • Handle: RePEc:spr:annopr:v:257:y:2017:i:1:d:10.1007_s10479-014-1717-0
    DOI: 10.1007/s10479-014-1717-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-014-1717-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-014-1717-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Adam J. Mersereau & Dan Zhang, 2012. "Markdown Pricing with Unknown Fraction of Strategic Customers," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 355-370, July.
    2. Wu, Cheng-Han, 2012. "Price and service competition between new and remanufactured products in a two-echelon supply chain," International Journal of Production Economics, Elsevier, vol. 140(1), pages 496-507.
    3. Paul Ingenbleek & Marion Debruyne & Ruud T. Frambach & Theo M. M. Verhallen, 2003. "Successful New Product Pricing Practices: A Contingency Approach," Marketing Letters, Springer, vol. 14(4), pages 289-305, December.
    4. Jehoshua Eliashberg & Abel P. Jeuland, 1986. "The Impact of Competitive Entry in a Developing Market Upon Dynamic Pricing Strategies," Marketing Science, INFORMS, vol. 5(1), pages 20-36.
    5. Minho Cho & Ming Fan & Yong-Pin Zhou, 2009. "Strategic Consumer Response to Dynamic Pricing of Perishable Products," International Series in Operations Research & Management Science, in: Christopher S. Tang & Serguei Netessine (ed.), Consumer-Driven Demand and Operations Management Models, edition 1, chapter 0, pages 435-458, Springer.
    6. Qian Liu & Dan Zhang, 2013. "Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation," Management Science, INFORMS, vol. 59(1), pages 84-101, August.
    7. Frank M. Bass & Alain V. Bultez, 1982. "Technical Note—A Note on Optimal Strategic Pricing of Technological Innovations," Marketing Science, INFORMS, vol. 1(4), pages 371-378.
    8. Xuanming Su, 2010. "Optimal Pricing with Speculators and Strategic Consumers," Management Science, INFORMS, vol. 56(1), pages 25-40, January.
    9. Xuanming Su, 2007. "Intertemporal Pricing with Strategic Customer Behavior," Management Science, INFORMS, vol. 53(5), pages 726-741, May.
    10. S. P. Sethi & A. Prasad & X. He, 2008. "Optimal Advertising and Pricing in a New-Product Adoption Model," Journal of Optimization Theory and Applications, Springer, vol. 139(2), pages 351-360, November.
    11. C K Anderson & J G Wilson, 2003. "Wait or buy? The strategic consumer: Pricing and profit implications," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(3), pages 299-306, March.
    12. Engelbert Dockner & Steffen Jørgensen, 1988. "Optimal Pricing Strategies for New Products in Dynamic Oligopolies," Marketing Science, INFORMS, vol. 7(4), pages 315-334.
    13. Rao, Vithala R, 1984. "Pricing Research in Marketing: The State of the Art," The Journal of Business, University of Chicago Press, vol. 57(1), pages 39-60, January.
    14. 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.
    15. Trichy V. Krishnan & Frank M. Bass & Dipak C. Jain, 1999. "Optimal Pricing Strategy for New Products," Management Science, INFORMS, vol. 45(12), pages 1650-1663, December.
    16. Gerald L. Thompson & Jinn-Tsair Teng, 1984. "Optimal Pricing and Advertising Policies for New Product Oligopoly Models," Marketing Science, INFORMS, vol. 3(2), pages 148-168.
    17. Shlomo Kalish, 1985. "A New Product Adoption Model with Price, Advertising, and Uncertainty," Management Science, INFORMS, vol. 31(12), pages 1569-1585, December.
    18. Bruce Robinson & Chet Lakhani, 1975. "Dynamic Price Models for New-Product Planning," Management Science, INFORMS, vol. 21(10), pages 1113-1122, June.
    19. Kinshuk Jerath & Serguei Netessine & Senthil K. Veeraraghavan, 2010. "Revenue Management with Strategic Customers: Last-Minute Selling and Opaque Selling," Management Science, INFORMS, vol. 56(3), pages 430-448, March.
    20. Barry L. Bayus, 1992. "The Dynamic Pricing of Next Generation Consumer Durables," Marketing Science, INFORMS, vol. 11(3), pages 251-265.
    21. Yuri Levin & Jeff McGill & Mikhail Nediak, 2009. "Dynamic Pricing in the Presence of Strategic Consumers and Oligopolistic Competition," Management Science, INFORMS, vol. 55(1), pages 32-46, January.
    22. Anthony Creane, 2002. "Uncertain Product Quality, Optimal Pricing and Product Development," Annals of Operations Research, Springer, vol. 114(1), pages 83-103, August.
    23. David Besanko & Wayne L. Winston, 1990. "Optimal Price Skimming by a Monopolist Facing Rational Consumers," Management Science, INFORMS, vol. 36(5), pages 555-567, May.
    24. Yossi Aviv & Amit Pazgal, 2008. "Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 339-359, December.
    25. Wedad Elmaghraby & Altan Gülcü & P{i}nar Keskinocak, 2008. "Designing Optimal Preannounced Markdowns in the Presence of Rational Customers with Multiunit Demands," Manufacturing & Service Operations Management, INFORMS, vol. 10(1), pages 126-148, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chang, Dongkyu & Lee, Jong Jae, 2022. "Price skimming: Commitment and delay in bargaining with outside option," Journal of Economic Theory, Elsevier, vol. 205(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wei-yu Kevin Chiang, 2012. "Supply Chain Dynamics and Channel Efficiency in Durable Product Pricing and Distribution," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 327-343, April.
    2. Dong, Junfeng & Wu, Desheng Dash, 2019. "Two-period pricing and quick response with strategic customers," International Journal of Production Economics, Elsevier, vol. 215(C), pages 165-173.
    3. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Pricing and Diffusion of Durables with Network Externalities," MPRA Paper 86203, University Library of Munich, Germany.
    4. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities," MPRA Paper 89893, University Library of Munich, Germany, revised 08 Nov 2018.
    5. Adil Baykasoğlu & İlker Gölcük & Derya Eren Akyol, 2017. "A fuzzy multiple-attribute decision making model to evaluate new product pricing strategies," Annals of Operations Research, Springer, vol. 251(1), pages 205-242, April.
    6. 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.
    7. Arian Aflaki & Pnina Feldman & Robert Swinney, 2019. "Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing," Operations Research, INFORMS, vol. 68(4), pages 1116-1131, July.
    8. Wenjing Shen & Izak Duenyas & Roman Kapuscinski, 2014. "Optimal Pricing, Production, and Inventory for New Product Diffusion Under Supply Constraints," Manufacturing & Service Operations Management, INFORMS, vol. 16(1), pages 28-45, February.
    9. Ghobadi, Somayeh Najafi- & Bagherinejad, Jafar & Taleizadeh, Ata Allah, 2021. "A two-generation new product model by considering forward-looking customers: Dynamic pricing and advertising optimization," Journal of Retailing and Consumer Services, Elsevier, vol. 63(C).
    10. Hongmin Li & Woonghee Tim Huh, 2012. "Optimal pricing for a short life‐cycle product when customer price‐sensitivity varies over time," Naval Research Logistics (NRL), John Wiley & Sons, vol. 59(7), pages 552-576, October.
    11. Zhiling Guo & Jianqing Chen, 2018. "Multigeneration Product Diffusion in the Presence of Strategic Consumers," Information Systems Research, INFORMS, vol. 29(1), pages 206-224, March.
    12. 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.
    13. Koray Cosguner & P. B. (Seethu) Seetharaman, 2022. "Dynamic Pricing for New Products Using a Utility-Based Generalization of the Bass Diffusion Model," Management Science, INFORMS, vol. 68(3), pages 1904-1922, March.
    14. Wu, Meng & Ran, Yun & Zhu, Stuart X., 2022. "Optimal pricing strategy: How to sell to strategic consumers?," International Journal of Production Economics, Elsevier, vol. 244(C).
    15. E. J. Dockner & G. E. Fruchter, 2004. "Dynamic Strategic Pricing and Speed of Diffusion," Journal of Optimization Theory and Applications, Springer, vol. 123(2), pages 331-348, November.
    16. Mustafa O. Kabul & Ali K. Parlaktürk, 2019. "The Value of Commitments When Selling to Strategic Consumers: A Supply Chain Perspective," Management Science, INFORMS, vol. 65(10), pages 4754-4770, October.
    17. Zhang, Jie & Chiang, Wei-yu Kevin, 2020. "Durable goods pricing with reference price effects," Omega, Elsevier, vol. 91(C).
    18. Jun Li & Nelson Granados & Serguei Netessine, 2014. "Are Consumers Strategic? Structural Estimation from the Air-Travel Industry," Management Science, INFORMS, vol. 60(9), pages 2114-2137, September.
    19. Yao Cui & Izak Duenyas & Ozge Sahin, 2018. "Pricing of Conditional Upgrades in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 64(7), pages 3208-3226, July.
    20. Chenxu Ke & Bo Yan & Ruofan Xu, 2017. "A group-buying mechanism for considering strategic consumer behavior," Electronic Commerce Research, Springer, vol. 17(4), pages 721-752, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:257:y:2017:i:1:d:10.1007_s10479-014-1717-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.