Sales and Promotions: A More General Model
21 Pages Posted: 30 Aug 2005
Date Written: August 2005
We embed the Varian (1980) model in a broader setting that considers how switcher/loyal customer segments are determined. Generally, customer acquisition is deterministic while pricing is randomized. The equilibrium outcome depends on the timing of customer acquisition relative to pricing. If sellers acquire customers before setting prices, the unique equilibrium is asymmetric. If sellers acquire customers and set prices simultaneously, the unique equilibrium is symmetric. Our results provide a fundamental justification for previous analyses that variously assumed the outcome to be asymmetric or symmetric. The comparative statics for the asymmetric and symmetric equilibria are identical.
Keywords: Competition, pricing, customer acquisition
JEL Classification: D44, L12, L14, M37
Suggested Citation: Suggested Citation