Price Competition in the Presence of Social Comparison and Demand Uncertainty

39 Pages Posted: 4 Feb 2015 Last revised: 8 Mar 2016

See all articles by Yun Zhou

Yun Zhou

McMaster University - Michael G. DeGroote School of Business

Ming Hu

University of Toronto - Rotman School of Management

Tony Haitao Cui

University of Minnesota - Twin Cities

Date Written: March 7, 2016

Abstract

We consider the price competition between a duopoly selling differentiated substitutable products under additive demand uncertainty, in which firms' decisions are influenced by social comparison. Social comparison theory, as well as conventional wisdom, suggests that social comparison behaviors, such as behind aversion (upward comparison) and ahead seeking (downward comparison), all work in the similar fashion to intensify competition. We demonstrate how opposite-directional social comparisons interact with demand variability to change competitive behaviors. In particular, we show that the stronger the behind aversion behavior, the more intense the price competition. Surprisingly, there is a threshold on the market variability above which price competition is more alleviated and below which price competition is more intensified, when the firms exhibit stronger ahead-seeking behavior. In addition, we also find that firms' biased perceptions of market variability may reduce price competition as the social comparison effect is influenced in different ways by the firm's own market variability and by the apparent market variability of the competitor.

These insights are robust under multiplicative demand uncertainty, but they are reversed for complementary products. We identify the driving forces behind these results. The findings also shed light on other interactions of strategic complements or substitutes in the presence of social comparisons, e.g., effort competition of sales agents in a competitive or collaborative environment.

Keywords: competition, pricing, social comparison, demand uncertainty

Suggested Citation

Zhou, Yun and Hu, Ming and Cui, Tony Haitao, Price Competition in the Presence of Social Comparison and Demand Uncertainty (March 7, 2016). Rotman School of Management Working Paper No. 2559498. Available at SSRN: https://ssrn.com/abstract=2559498 or http://dx.doi.org/10.2139/ssrn.2559498

Yun Zhou

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Tony Haitao Cui (Contact Author)

University of Minnesota - Twin Cities ( email )

321 19th Ave S
Suite 3-150
Minneapolis, MN 55455
United States

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