Template-Type: ReDIF-Paper 1.0
Title: Product Pricing when Demand Follows a Rule of Thumb
Author-Name: Christina Matzke
Author-Email: cmatzke@uni-bonn.de
Author-Name: Benedikt Wirth
Classification-JEL: C61, C62, C79, L11, L21, M31, M37
Keywords: bounded rationality, social learning, population game, differential game, product life cycle, monopoly, competition, pricing, advertising
Abstract: We analyze the strategic behavior of firms when
	demand is determined by a rule of thumb behavior
	of consumers. We assume consumer dynamics where
	individual consumers follow simple behavioral
	decision rules governed by imitation and habit as
	suggested in consumer research. On this basis, we
	investigate monopoly and competition between firms,
	described via an open-loop differential game which
	in this setting is equivalent to but analytically
	more convenient than a closed-loop system. We
	derive a Nash equilibrium and examine the
	influence of advertising. We show for the monopoly
	case that a reduction of the space of all price
	paths in time to the space of time-constant prices
	is sensible since the latter in general contains
	Nash equilibria. We prove that the equilibrium
	price of the weakest active firm tends to marginal
	cost as the number of (non-identical) firms grows.
	Our model is consistent with observed market
	behavior such as product life cycles.
Note: 
Length: 37
Creation-Date: 2009-02
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse3_2009.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse3_2009