Why, How and When Do Prices Land? Evidence from the Videogame Industry
Erasmus Research Institute of Management (ERIM)
Econometric Institute - Erasmus University Rotterdam; Erasmus Research Institute of Management (ERIM); Tinbergen Institute Rotterdam
Philip Hans Franses
Erasmus University Rotterdam (EUR) - Department of Econometrics
22 2008 7,
ERIM Report Series Reference No. ERS-2008-041-MKT
We examine how new products are priced over time, where we particularly look at sharp decreases in prices. New durable products like fashion, apparel, and videogames often show a significant price cut some time after the product's introduction. We call this a price landing and we examine its drivers. Theory predicts that competitive effects or underperforming sales are drivers for such price landings. To our knowledge, however, a systematic empirical study of price landing is unavailable. To examine the drivers of significant price cuts of a new product, we consider a rich dataset concerning sales and prices of 1195 newly released videogames. Prior literature suggests that own sales, competitive sales, competitive prices or simply time could be such drivers. In this paper we put these suggestions to an empirical test. We put forward a mixture model that covers a set of pricing equations with the price landing moment and its speed as key parameters. Second, in a hierarchical model we explain the apparent heterogeneity across the products. Our main finding is that it is not sales thresholds but competition and time itself that makes managers decide to seriously cut prices.
Number of Pages in PDF File: 61
Keywords: pricing, pricing models, new products
JEL Classification: C44, M31, Mworking papers series
Date posted: August 8, 2008
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