Optimal Pricing and Advertising Strategy for Introducing a New Business Product with Threat of Competitive Entry

Industrial Marketing Management, Vol. 36, No. 4, pp. 540-548, May 2007

Posted: 28 Feb 2012

See all articles by Manak Gupta

Manak Gupta

Temple University - Department of Finance

Anthony Di Benedetto

Temple University

Date Written: 2007

Abstract

The problem of optimal joint pricing and advertising decision making for a new product facing potential competitive entry has received inadequate attention. We propose a model that attempts to find the optimal price – advertising frontier in the face of potential competitive entry that maximizes total discounted profits for pre- and post-entry periods. We find that a firm would charge the price that equates price elasticity to marginal revenue product of advertising (as predicted by [Dorfman, R. and Steiner, P.O. (1954), Optimal Advertising and Optimal Quality, American Economic Review, 44(5), 826-836.]) only when the potential effects of pricing and advertising on its market share are not considered. Under optimal conditions, aware that market share is subject to erosion, the firm charges a somewhat lower price than the profit maximizing price, and sets an advertisement expense that is somewhat higher than the profit-maximizing advertising level as predicted by Cournot's monopolistic setting. We illustrate the applicability of our model using business product examples taken from several industries including operating systems, software, pharmaceutical, and telephone switching. Directions for future research with implications for B2B managers (for example, the possible effects of preannouncement to forestall competitive entry) are discussed.

Suggested Citation

Gupta, Manak C. and Di Benedetto, Anthony, Optimal Pricing and Advertising Strategy for Introducing a New Business Product with Threat of Competitive Entry (2007). Industrial Marketing Management, Vol. 36, No. 4, pp. 540-548, May 2007. Available at SSRN: https://ssrn.com/abstract=2012631

Manak C. Gupta

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

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