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Title:Product pricing when demand follows a rule of thumb PDF Logo
Authors:Matzke, Christina
Wirth, Benedikt
Issue Date:2009
Series/Report no.:Bonn econ discussion papers 2009,3
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.
Subjects:Bounded rationality
social learning
population game
differential game
product life cycle
monopoly
competition
pricing
advertising
JEL:C61
C62
C79
L11
L21
M31
M37
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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