Price commitment vs. Price flexibility : effects on new product introduction with quality imitation and spillover

Abstract

Introducing new products into the marketplace presents significant challenges, notably the free-riding behavior of copycats that affects both large corporations and small business innovators. Developing effective strategies to mitigate this issue is crucial for achieving success in competitive markets. Additionally, when competing firms embark on exploring new markets, they often face dual pressures: the need to enhance product quality by accumulating experience and progressing along learning curves, and the inadvertent expansion of brand awareness that benefits all competing products. These dynamics underscore the complex interplay between innovation, competition, and market entry strategies that are central to overcoming obstacles in new product introduction and market exploration. In the first study, we examine the role of price commitment and quality management as strategies to tackle the threat of imitation. We develop a parsimonious game-theoretic model involving an innovator and a copycat to analyze the impact of committed pricing and flexible pricing strategies on imitation deterrence and their effects on welfare. Our findings reveal several key insights. First, when quality is exogenous, flexible pricing is more effective in blockading copycats, whereas committed pricing excels in deterring them. However, when quality is endogenously managed, flexible pricing may outperform committed pricing in deterring copycats. Second, innovators should pursue price leadership through committed pricing when quality investment is inexpensive. By contrast, when quality investment is moderately affordable, the flexibility provided by flexible pricing consistently makes the firm better off. Third, the threat of imitation incentivizes innovators to strategically limit both price and quality under either pricing strategy. In this context, limit quality and limit pricing function as strategic complements, and the presence of replica products can lead to a more aggressive approach in both dimensions. Last, a reduction in quality investment costs or an increase in market competition does not necessarily benefit consumers or society. Their potential benefits can be outweighed by the strategic reduction in product quality, resulting in adverse outcomes for both consumer surplus and social welfare. We further validate the robustness of our findings in the presence of strategic consumers. This study underscores the intricate interplay between pricing strategies, quality management, and imitation, highlighting the nuanced challenges innovators face in safeguarding their market position. In the second study, we study a two-period duopoly price competition where firms can improve their quality based on the accumulated demand (learn-by-doing effect) and their potential market size is positively affected by both firms' quality levels (quality spillover effect). In addition, we investigate two pricing schemes, namely, committed pricing and dynamic pricing, and their impact on the equilibrium outcomes. Assuming the two firms are symmetric in every aspect, our main findings include the following. First, we establish the existence and uniqueness of the pure Nash equilibrium for the dynamic game under either pricing scheme, and show that firms always set a low price in the first period to leverage quality improvement. As the quality spillover effect gets stronger, firms tend to raise their first-period price, leading to a lower individual quality improvement and a non-monotonic impact on firms' profit. Moreover, we find that committed pricing scheme benefits the duopoly when the spillover effect is strong, otherwise dynamic pricing scheme brings more profits. Finally, we examine two asymmetric cases where the firms are different in certain attributes pertaining to their learning speed and the quality spillover strength. Our analysis shows that the findings in the symmetric case still hold qualitatively. Useful managerial insights are derived from these studies.