Price Competition with Optimal Product Demonstrations

Research Seminars
Academic Areas Operations Management
Prof. Haresh Gurnani, Leslie O Barnes Scholar, and Professor of Management University of Miami
June 21, 2013 | 10:30 AM - 12:00 PM | Friday
AC 2 Mini Lecture Theatre, Level 2, Hyderabad, India
For ISB Community
We develop a game theoretic model of price competition in which an innovating firm can offer product demonstrations. Placing minimal restriction on the firm’s ability to design demonstrations, we show that the equilibrium demonstration resolves some but not all customer valuation uncertainty and allows the innovating firm to attract customers while maintaining a high price. Consumer surplus may be lower with endogenous demonstrations than without demonstrations. Regulation requiring firms to provide fully-informative demonstrations (e.g., generous return policies or inspection periods) can further reduce consumer surplus. The abilityto design demonstrations also creates incentives for innovating firms to limit the market appeal of their products, suggesting another mechanism through which product demonstrations can reduce market efficiency. The results have implications for firm management and pricing strategies and for consumer protection.