Dynamic pricing of durables: Incorporating buyer expectations and experience effects

This research examines the impact of buyer expectations on a firm\u27s pricing strategy over time for a new durable. Two markets are examined; (1) a monopoly in which buyers\u27 reservation prices change over time as a result of experience effects, and (2), a duopoly in which the firms sell differentiated products. The study draws from economic theory and the rich marketing literature in the area of diffusion models. A game theoretic framework is used in which the buyers are assumed to form rational expectations. A combination of analytical and simulation techniques are used to analyze a variety of common scenarios. Intuition and informal evidence suggests that buyers\u27 adoption decisions are influenced not only by the current price and product offering but also by their expectation of future prices and product offerings as well. The results of this study show that future expectations can play a key role in the competitive interaction between firms in a duopoly, and in determining the pricing strategy of a monopolist