The Triggers, Timing and Speed of New Product Price Landings

Abstract:     
Many high-tech products and durable goods exhibit exactly one significant price cut some time after their launch. We call this sudden transition from high to low prices the price landing. In this paper we present a new model that describes two important features of price landings: their timing and their speed. Prior literature suggests that prices might be driven by sales, product line pricing, competitor’s sales or simply by time. We propose a model using mixture components that identifies which of these explanations is the most likely trigger of price landings. We define triggers as thresholds after which prices are significantly cut. In addition, price landings might differ across products and therefore we model their heterogeneity with a hierarchical structure that depends mainly on firm, product type and seasonal effects. We estimate our model parameters applying Bayesian methodology and we use a rich dataset containing the sales and prices of 1195 newly released video-games (VG’s). In contrast with previous literature, we find that competition and time itself are the main triggers of price landings while past sales and product line are less likely triggers. Moreover, we find substantial heterogeneity in the timing and speed of price landing across firms and product types.

Number of Pages in PDF File: 61

Keywords: pricing, pricing models, new products

JEL Classification: C44, M31, M, L11, D4

working papers series