Pricing, Advertising, and Endogenous Consideration of an 'Insistent' Product

36 Pages Posted: 12 Aug 2019

See all articles by Peter Landry

Peter Landry

University of Toronto - Rotman School of Management

Date Written: May 21, 2019

Abstract

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

Landry, Peter, Pricing, Advertising, and Endogenous Consideration of an 'Insistent' Product (May 21, 2019). Available at SSRN: https://ssrn.com/abstract=3434335 or http://dx.doi.org/10.2139/ssrn.3434335

Peter Landry (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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