Stochastic Competitive Entries and Dynamic Pricing

European Journal of Operational Research, Forthcoming

30 Pages Posted: 29 Jun 2013

See all articles by Olivier Rubel

Olivier Rubel

University of California, Davis - Graduate School of Management

Date Written: May 2013

Abstract

How should firms price new products when they don’t know the timing, nor the nature of the next competitive entry? To guide managers’ pricing decisions in such contexts, we propose a dynamic pricing model with two types of randomly timed entry, i.e. imitative and innovative. The characterization of the equilibrium strategies reveals how optimal prices vary with the manager’s knowledge about the timing of future competitive entries. We show that price skimming is not always optimal when entry dates are unknown to managers. Everything else equal, we demonstrate that the randomness of competitive entries make forward looking managers to choose constant prices, even though the characteristics of the market would have justified skimming the demand in the normal course. Moreover, we show that the constant pricing policy remains optimal even when the incumbent’s optimal pricing strategy influences the probability of facing a competitive entry. Finally, we find that uncertainty does not necessarily hurt firms’ profits.

Keywords: Optimal Control, Pricing, Entry, Stochastic Differential Games

Suggested Citation

Rubel, Olivier, Stochastic Competitive Entries and Dynamic Pricing (May 2013). European Journal of Operational Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2286885

Olivier Rubel (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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