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Demonstrations And Price Competition In New Product Release

Author

Listed:
  • Christopher Cotton

    () (Queen's University)

  • Haresh Gurnani

    (Wake Forest University)

  • Raphael Boleslavsky

    (University of Miami)

Abstract

We incorporate product demonstrations into a game theoretic model of firm price competition. Demonstrations may include product samples, trials, return policies, reviews, or any other means by which a firm allows consumers to learn about their value for a new product. In our model, demonstrations help individual consumers learn whether they prefer an innovation over an established product. The innovative firm controls demonstration informativeness. When prices can respond to demonstration policies, the firm prefers to provide maximumly informative demonstrations, which optimally segment the market, dampen subsequent price competition, and maximize profits. In contrast, when prices are less flexible, the firm prefers only partially informative demonstrations, designed to maximize its market share at prevailing prices. Such a strategy can generate the monopoly profit for the innovative firm. We contrast the strategic role of demonstrations in our framework with the strategic role of capacity limits in models of judo economics (e.g. Gelman and Salop 1983), which also allow firms to divide a market and reduce competition.

Suggested Citation

  • Christopher Cotton & Haresh Gurnani & Raphael Boleslavsky, 2015. "Demonstrations And Price Competition In New Product Release," Working Paper 1347, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1347
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    References listed on IDEAS

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    Cited by:

    1. Salvatore Piccolo & Aldo Pignataro, 2016. "Consumer Loss Aversion, Product Experimentation and Implicit Collusion," CSEF Working Papers 457, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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    More about this item

    Keywords

    judo economics; demonstrations; product trials; product samples; return policies; money back guarantees; marketing strategy; product differentiation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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