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Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation

Author

Listed:
  • Qian Liu

    (Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Dan Zhang

    (Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309)

Abstract

We consider dynamic pricing competition between two firms offering vertically differentiated products to strategic customers who are intertemporal utility maximizers. We show that price skimming arises as the unique pure-strategy Markov perfect equilibrium in the game under a simple condition. Our results highlight the asymmetric effect of strategic customer behavior on quality-differentiated firms. Even though the profit of either firm decreases as customers become more strategic, the low-quality firm suffers substantially more than the high-quality firm. Furthermore, we show that unilateral commitment to static pricing by either firm generally improves profits of both firms. Interestingly, both firms enjoy higher profit lifts when the high-quality firm commits rather than when the low-quality firm commits. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:1:p:84-101
    DOI: 10.1287/mnsc.1120.1564
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    References listed on IDEAS

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