Pricing competition on innovative product between innovator and entrant imitator facing strategic customers

Abstract

When an innovative product is introduced into the market, innovators always face competition from entrant imitators. Strategic customers may also anticipate this and can design their purchase plans accordingly. In this study, we develop a dynamic game model to formulate the problem associated with competitive product pricing between an innovator and an imitator for obtaining a pricing equilibrium. The influence of various factors on pricing policies, market sales and profits are analysed. We argue that when anticipating forthcoming competitors, innovators should not price too highly in the monopoly stage. The optimal monopoly price decreases with the quality ratio and forms a U shape along with the dimension of customers’ strategic level; however, the right tail of the U is mitigated when the quality ratio increases. In the duopoly phase, the markdown for the innovator and the difference in product cost performance between the innovator and imitator are investigated. We then analyse the value of demand information. The numerical analysis indicates that the value decreases with customers’ strategic level and increases with the quality ratio. The revealing behaviour of the innovator influences the imitator marginally in pricing and considerably in profit. Finally, a medium level is always preferred when the imitator chooses the product quality level.

Keywords:

• pricing competition
• strategic purchasing
• innovative product
• game theory

Disclosure statement

No potential conflict of interest was reported by the authors.

Acknowledgements

The authors would like to thank Qi Xiangtong, Li Yongjian, Du Yuquan, Zhang Yongshuai and Sun Ning for the enlightening discussions.

Funding

Peng Du’s research is partially supported by the National Nature Science Foundation of China [grant number 71172071], [grant number 61403213]; the Specialized Research Fund for the Doctoral Program of Higher Education under [grant number 20120031110036]. Lei Xu’s research is partially supported by the National Nature Science Foundation of China [grant number 71302005], [grant number 71372100].

Notes

1. On 30 July 2012, the Apple versus Samsung patent war continued in a San Jose federal court, which is known as ‘the Patent Trial of the Century’. For more information, please refer to http://tech.fortune.cnn.com/2012/07/30/apple-v-samsung-the-patent-trial-of-the-century-starts-today/.

2. This technically requires all customers to know the maximum valuation before they make their purchase decisions, which is one of this study’s assumptions.

3. Sequentially, before the formal launch, Firm I offers free samples (Jain, Mahajan, and Muller 1995) or sampling to introduce and promote the product. Firm E capitalises by learning about the product, determining the value of , and organising production procedures accordingly. Firm I then releases the product with p_I1.

4. More information is provided in Harston and Mattson (2009) and Curtis, Harston, and Mattson (2009).

5. Practically, an enterprise always investigates the market before starting product innovation. We assume that the innovator obtains the knowledge through market investigation, which convinces the enterprise to innovate.

6. Please refer to the proof of Proposition 1 in the Appendix.

7. Without losing generality, we assume customers who are indifferent between buying and waiting always choose to wait; furthermore, we assume that customers who are indifferent between buying a high-quality and low-quality product always choose to buy the low-quality product, and customers who are indifferent between buying and leaving the market do not make any purchases.

8. Take , only covering proportion of the increasing cost.

9. The market share for firm I is . A higher β indicates a larger .

10. We set when .

11. Because of space limitations, the figures are not included here but are available upon request.

12. Some of the figures in this paper are displayed as multitimes of the target values for clarity.