Price Competition with Optimal Product Demonstrations

42 Pages Posted: 5 Jun 2013

See all articles by Raphael Boleslavsky

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics

Christopher Cotton

Queen's University, Department of Economics

Haresh Gurnani

Wake Forest University School of Business

Date Written: February 13, 2013

Abstract

We develop a game theoretic model of price competition in which an innovating firm can offer product demonstrations. Placing minimal restriction on the firm’s ability to design demonstrations, we show that the equilibrium demonstration resolves some but not all customer valuation uncertainty and allows the innovating firm to attract customers while maintaining a high price. Consumer surplus may be lower with endogenous demonstrations than without demonstrations. Regulation requiring firms to provide fully-informative demonstrations (e.g., generous return policies or inspection periods) can further reduce consumer surplus. The ability to design demonstrations also creates incentives for innovating firms to limit the market appeal of their products, suggesting another mechanism through which product demonstrations can reduce market efficiency. The results have implications for firm management and pricing strategies and for consumer protection.

Keywords: price competition, Bayesian persuasion, product demonstrations, trial periods, return policies, test drives

Suggested Citation

Boleslavsky, Raphael and Cotton, Christopher and Gurnani, Haresh, Price Competition with Optimal Product Demonstrations (February 13, 2013). Available at SSRN: https://ssrn.com/abstract=2274267 or http://dx.doi.org/10.2139/ssrn.2274267

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Christopher Cotton (Contact Author)

Queen's University, Department of Economics ( email )

Dunning Hall 230
Kingston, Ontario K7L 3N6
Canada

HOME PAGE: http://www.christophercotton.ca

Haresh Gurnani

Wake Forest University School of Business ( email )

2601 Wake Forest Road
Winston-Salem, NC 27109
United States

HOME PAGE: http://business.wfu.edu/directory/haresh-gurnani/ Haresh Gurnani

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