Competitive pricing and product strategies in the presence of consumers’ social comparisons

Abstract

When buying products that are used in public (e.g., smart phones and cars), consumers may compare their products with those of others they meet in their community. This behavior is referred to as “social comparisons”. In these comparisons, the consumers make (incur) a psychological gain (loss) when they find that their product is superior (inferior). Analytically examining this psychological gain (loss) from “the consumer's social-comparison benefit (cost)”, we show how it would affect the pricing, quality, and product-line strategies of two competing firms. We find that a greater consumer's social-comparison benefit may increase both firms’ profits by reducing their price competition, while a higher consumer's social-comparison cost may decrease both firms’ profits by intensifying their price competition. When the firms can strategically choose their product quality, a greater consumer's social-comparison benefit will lead the firms to increase their quality difference, and a higher consumer's social-comparison cost will lead the firms to reduce their quality difference. When the firms can extend their product lines to sell more than one product, their product lines tend to shrink (expand) as the consumer's social-comparison benefit (cost) increases. If the consumer's social-comparison benefit is low relative to the consumer's social-comparison cost, both firms earn higher profits when they can extend their product lines (versus when they cannot extend their product lines). This result highlights that relative to reducing the quality difference between the two firms, the product-line extension strategy can be a more effective way for the firms to manage consumers’ social comparisons. Our results show that understanding consumers’ social comparisons is important for firms to formulate an effective product offering strategy.