Predicting buyer-seller pricing disparities

Article Abstract:

Recent research literature indicates that compensation demanded (CD) to give up a commodity tends to greatly surpass willingness to pay (WTP) to acquire the same commodity. Traditional assumptions of economic rationality cannot account for the observed disparities between CD and WTP because they are much too large. A behavioral model based on the prospect theory is developed for predicting CD and WTP. This model generates five transaction encoding rules which are, in principle, all applicable to a buyer or seller. It proposes that CD/WTP disparities are created because buyers and sellers differ in how they encode the prospective transaction, and that these disparities can occur in various ways and size, depending on encoding. The model is tested in two experiments. The results are discussed.

Decision-making, Decision making, Judgment, Judgment (Psychology)

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Price competition and compatibility in the presence of positive demand externalities

Article Abstract:

The influence of demand externalities, compatibility and price and profit competition on the dynamic pricing strategies of an incumbent and a later entrant are examined. Optimal pricing is modeled as a differential game with the optimal price trajectory developed as Nash open-loop controls. Findings reveal that an increasing price trajectory can be optimal in a duopoly durable goods market with high demand externalities. A new entrant is found to benefit if its products are compatible with the incumbents' products, particularly when demand externalities are heavy and the installed incumbent base is extensive. The incumbent may also find it to its advantage to agree on common standards. In strong demand externalities and a small installed base, the incumbent has an edge in compatible entry.

New products, Product introduction

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