Pricing, Advertising, and Endogenous Consideration of an 'Insistent' Product
36 Pages Posted: 12 Aug 2019
Date Written: May 21, 2019
This paper theoretically investigates the pricing and advertising decisions of a monopolist that sells to consumers who, in any given period, may or may not consider the (cognitively costly) decision to buy its product. In the proposed model, consumers can be compelled by advertising to consider the buying decision, while a consumer’s likelihood of considering the decision in the absence of advertising depends on past buying decisions. A product is then said to be “insistent” if not buying it (when considered) increases the likelihood of considering the buying decision in the next period, and “noninsistent” if the opposite is true. As one of several differences for marketing such products implied by the model, it is optimal for the firm to use price skimming for an insistent product and penetration pricing for a non-insistent product, through both strategies should be refreshed at the beginning of each advertising cycle. The model also offers a micro-grounded mechanism (in terms of consumers’ forward-looking buying decisions with “endogenous consideration”) for several advertising concepts, such as diminishing returns when repeating an advertisement, greater returns when advertising newer products, advertising pulsing (as an optimal equilibrium strategy), and even the possibility of “wearout.” New implications regarding the use of free samples, anticipation-building (i.e. delayed selling) strategies, and for marketing “worthless” products are also explored.
Keywords: consumer decision-making, theory, (in)attention, advertising, pricing
JEL Classification: D03, D11, D21
Suggested Citation: Suggested Citation