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Equilibrium Pricing and Advertising Strategies for Nondurable Experience Products in a Dynamic Duopoly

Pradeep K. Chintagunta, Vithala R. Rao and Naufel J. Vilcassim
Managerial and Decision Economics
Vol. 14, No. 3 (May - Jun., 1993), pp. 221-234
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2487940
Page Count: 14
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Equilibrium Pricing and Advertising Strategies for Nondurable Experience Products in a Dynamic Duopoly
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Abstract

The quality of many consumer nondurable goods or services is sufficiently complex or obscure that consumers cannot completely verify the true quality in a single usage. For such `experience' products or services, the accumulated consumer consumption experience of a brand is an important determinant of its sales or market share. The market share of a brand is in turn directly influenced by its own and the competitive price and advertising strategies, given the different levels of quality (among other factors). In this paper, we investigate the impact of the aggregate consumption experience on the firm's dynamic pricing and advertising strategies by developing a formal game-theoretic model of a dynamic duopoly. The model of competition does not yield explicit closed-form expressions for the dynamic price and advertising paths of the two firms. Hence, we simulate the equilibrium paths using a discrete-time algorithm. Our simulation results provide interesting insights into the dynamic equilibrium price and advertising paths, under a variety of realistic competitive scenarios.

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