Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games
Firms in durable good product markets face incentives to intertemporally price discriminate, by setting high initial prices to sell to consumers with the highest willingness to pay, and cutting prices thereafter to appeal to those with lower willingness to pay. A critical determinant of the profitability of such pricing policies is the extent to which consumers anticipate future price declines, and delay purchases. We develop a framework to investigate empirically the optimal pricing over time of a firm selling a durable-good product to such strategic consumers. Prices in our model are equilibrium outcomes of a game played between forward-looking consumers who strategically delay purchases to avail of lower prices in the future, and a forward-looking firm that takes this consumer behavior into account in formulating its optimal pricing policy. The model incorporates first, a method to infer estimates of demand under dynamic consumer behavior, and second, an algorithm to compute the optimal sequence of prices given these demand estimates. The model is solved using numerical dynamic programming techniques. We present an empirical application to the market for video-games in the US. The results indicate that consumer forward-looking behavior has a significant effect on optimal pricing and profits of games in the industry. Simulations reveal that the profit losses of ignoring forward-looking behavior by consumers are large and economically significant, and suggest that market research that provides information regarding the extent of discounting by consumers is valuable to video-game firms.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Judith Chevalier & Austan Goolsbee, 2005.
"Are Durable Goods Consumers Forward Looking? Evidence from College Textbooks,"
NBER Working Papers
11421, National Bureau of Economic Research, Inc.
- Judith Chevalier & Austan Goolsbee, 2009. "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1853-1884, November.
- Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986.
"Foundations of dynamic monopoly and the coase conjecture,"
Journal of Economic Theory,
Elsevier, vol. 39(1), pages 155-190, June.
- Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
- J. Miguel Villas-Boas & Russell S. Winer, 1999. "Endogeneity in Brand Choice Models," Management Science, INFORMS, vol. 45(10), pages 1324-1338, October.
- Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
- Rust, John, 1996. "Numerical dynamic programming in economics," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 14, pages 619-729 Elsevier.
- Pradeep Chintagunta & Jean-Pierre Dubé & Khim Yong Goh, 2005. "Beyond the Endogeneity Bias: The Effect of Unmeasured Brand Characteristics on Household-Level Brand Choice Models," Management Science, INFORMS, vol. 51(5), pages 832-849, May.
- Gautam Gowrisankaran & Marc Rysman, 2009.
"Dynamics of Consumer Demand for New Durable Goods,"
NBER Working Papers
14737, National Bureau of Economic Research, Inc.
- Gautam Gowrisankaran & Marc Rysman, 2007. "Dynamics of Consumer Demand for New Durable Goods," Boston University - Department of Economics - Working Papers Series WP2007-024, Boston University - Department of Economics.
- Günter J. Hitsch, 2006. "An Empirical Model of Optimal Dynamic Product Launch and Exit Under Demand Uncertainty," Marketing Science, INFORMS, vol. 25(1), pages 25-50, 01-02.
- Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
- Preyas S. Desai & Devavrat Purohit, 1999. "Competition in Durable Goods Markets: The Strategic Consequences of Leasing and Selling," Marketing Science, INFORMS, vol. 18(1), pages 42-58.
- Jean-Pierre Dubé & Günter Hitsch & Puneet Manchanda, 2005. "An Empirical Model of Advertising Dynamics," Quantitative Marketing and Economics, Springer, vol. 3(2), pages 107-144, June.
- Tülin Erdem & Michael Keane & T. Öncü & Judi Strebel, 2005. "Learning About Computers: An Analysis of Information Search and Technology Choice," Quantitative Marketing and Economics, Springer, vol. 3(3), pages 207-247, September.
- Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
- Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
- Keane, Michael P & Wolpin, Kenneth I, 1994.
"The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence,"
The Review of Economics and Statistics,
MIT Press, vol. 76(4), pages 648-72, November.
- Michael P. Keane & Kenneth I. Wolpin, 1994. "The solution and estimation of discrete choice dynamic programming models by simulation and interpolation: Monte Carlo evidence," Staff Report 181, Federal Reserve Bank of Minneapolis.
- Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
- Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
- Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
- Subramanian Balachander & Kannan Srinivasan, 1998. "Modifying Customer Expectations of Price Decreases for a Durable Product," Management Science, INFORMS, vol. 44(6), pages 776-786, June.
- Shlomo Kalish, 1983. "Monopolist Pricing with Dynamic Demand and Production Cost," Marketing Science, INFORMS, vol. 2(2), pages 135-159.
- Vijay Mahajan & Eitan Muller & Roger A. Kerin, 1984. "Introduction Strategy for New Products with Positive and Negative Word-of-Mouth," Management Science, INFORMS, vol. 30(12), pages 1389-1404, December.
- Sha Yang & Yuxin Chen & Greg Allenby, 2003. "Bayesian Analysis of Simultaneous Demand and Supply," Quantitative Marketing and Economics, Springer, vol. 1(3), pages 251-275, September.
- Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
- Ching, Andrew T., 2010.
"Consumer learning and heterogeneity: Dynamics of demand for prescription drugs after patent expiration,"
International Journal of Industrial Organization,
Elsevier, vol. 28(6), pages 619-638, November.
- Ching, Andrew, 2008. "Consumer Learning and Heterogeneity: Dynamics of Demand for Prescription Drugs after Patent Expiration," MPRA Paper 7265, University Library of Munich, Germany.
- Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
- Hugo Benitez-Silva & John Rust & Gunter Hitsch & Giorgio Pauletto & George Hall, 2000. "A Comparison Of Discrete And Parametric Methods For Continuous-State Dynamic Programming Problems," Computing in Economics and Finance 2000 24, Society for Computational Economics.
- Edward P. Lazear, 1984.
"Retail Pricing and Clearance Sales,"
NBER Working Papers
1446, National Bureau of Economic Research, Inc.
- Amil Petrin & Kenneth Train, 2003. "Omitted Product Attributes in Discrete Choice Models," NBER Working Papers 9452, National Bureau of Economic Research, Inc.
- Conlisk, John & Gerstner, Eitan & Sobel, Joel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 489-505, August.
- 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.
When requesting a correction, please mention this item's handle: RePEc:kap:qmktec:v:5:y:2007:i:3:p:239-292. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.