Price Competition with Repeat, Loyal Buyers, Quantitative Marketing and Economics
Extant promotion models predict that a leading brand should either offer infrequent, deep discounts or frequent, shallow discounts. However, in some markets, the leading brand offers the deepest and most frequent discounts. In this paper, we develop a dynamic model of two competing firms that can explain why leading brands may use this pricing strategy. Our model considers a duopoly in which each firm differs in their ability to convert consumers who are initially indifferent into repeat, loyal buyers. We show that it is optimal for a leading firm who attracts more repeat, loyal buyers to sustain its market position via deep, frequent discounts. The unique aspect of our paper is that we analyze how firm's relative ability to attract repeat, loyal consumers affects their pricing strategies. Our analysis highlights three additional results. First, there is an inverted-U relationship between a weak firm's ability to attract repeat, loyal consumers and strong firm profits. Second, the relative ability of firms to attract repeat buyers affects whether serial and contemporaneous price correlations are positive or negative. Third, a comparison of myopic and dynamic pricing strategies shows that myopia only benefits both firms when each attracts a sufficient number of repeat buyers.
Eric T. Anderson, Nanda Kumar
Anderson, T. Eric, and Nanda Kumar. 2007. Price Competition with Repeat, Loyal Buyers. Quantitative Marketing and Economics. 5(4): 333-359.