Abstract
To entice consumers to purchase both current and next generation products, many manufacturers and retailers offer trade-in programs that allow buyers of the first generation product to trade-in the product and purchase the new generation product at a lower price. By considering the interactions between "forward-looking" consumers and a firm when a trade-in program is offered, we analyze a two-period dynamic game to determine the optimal prices of two successive-generation products in equilibrium, and examine the conditions under which trade-in programs are beneficial to the firm. Our model incorporates market heterogeneity (valuation of the first generation product varies among the consumer population), product uncertainty (the incremental value of the new product is uncertain before its introduction), and consumers' forward-looking behavior (consumers take future product valuation and prices into consideration when making purchasing decisions). With the trade-in option, we show that consumers are willing to pay a price that is higher than their valuations of the current product. Furthermore, trade-in programs are more beneficial to the firm when: (i) the durability of the current product is high; (ii) the market heterogeneity is low; or (iii) the uncertainty level (or the expected incremental value) of the new product is high. Finally, when the incremental value of the new product is more uncertain, consumers are more willing to purchase the current product because of the "option" value of the trade-in programs and thus trade-in programs can be more beneficial to the firm in this case.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 565-595 |
| Number of pages | 31 |
| Journal | Decision Sciences |
| Volume | 46 |
| Issue number | 3 |
| DOIs | |
| State | Published - Jun 1 2015 |
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Keywords
- Consumer Behavior
- Decision Analysis
- Marketing and Manufacturing Interfaces
- Pricing
ASJC Scopus subject areas
- Management of Technology and Innovation
- Strategy and Management
- Business, Management and Accounting(all)
- Information Systems and Management
Cite this
Optimal Pricing of Two Successive-Generation Products with Trade-in Options under Uncertainty. / Yin, Rui; Li, Hongmin; Tang, Christopher S.
In: Decision Sciences, Vol. 46, No. 3, 01.06.2015, p. 565-595.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Optimal Pricing of Two Successive-Generation Products with Trade-in Options under Uncertainty
AU - Yin, Rui
AU - Li, Hongmin
AU - Tang, Christopher S.
PY - 2015/6/1
Y1 - 2015/6/1
N2 - To entice consumers to purchase both current and next generation products, many manufacturers and retailers offer trade-in programs that allow buyers of the first generation product to trade-in the product and purchase the new generation product at a lower price. By considering the interactions between "forward-looking" consumers and a firm when a trade-in program is offered, we analyze a two-period dynamic game to determine the optimal prices of two successive-generation products in equilibrium, and examine the conditions under which trade-in programs are beneficial to the firm. Our model incorporates market heterogeneity (valuation of the first generation product varies among the consumer population), product uncertainty (the incremental value of the new product is uncertain before its introduction), and consumers' forward-looking behavior (consumers take future product valuation and prices into consideration when making purchasing decisions). With the trade-in option, we show that consumers are willing to pay a price that is higher than their valuations of the current product. Furthermore, trade-in programs are more beneficial to the firm when: (i) the durability of the current product is high; (ii) the market heterogeneity is low; or (iii) the uncertainty level (or the expected incremental value) of the new product is high. Finally, when the incremental value of the new product is more uncertain, consumers are more willing to purchase the current product because of the "option" value of the trade-in programs and thus trade-in programs can be more beneficial to the firm in this case.
AB - To entice consumers to purchase both current and next generation products, many manufacturers and retailers offer trade-in programs that allow buyers of the first generation product to trade-in the product and purchase the new generation product at a lower price. By considering the interactions between "forward-looking" consumers and a firm when a trade-in program is offered, we analyze a two-period dynamic game to determine the optimal prices of two successive-generation products in equilibrium, and examine the conditions under which trade-in programs are beneficial to the firm. Our model incorporates market heterogeneity (valuation of the first generation product varies among the consumer population), product uncertainty (the incremental value of the new product is uncertain before its introduction), and consumers' forward-looking behavior (consumers take future product valuation and prices into consideration when making purchasing decisions). With the trade-in option, we show that consumers are willing to pay a price that is higher than their valuations of the current product. Furthermore, trade-in programs are more beneficial to the firm when: (i) the durability of the current product is high; (ii) the market heterogeneity is low; or (iii) the uncertainty level (or the expected incremental value) of the new product is high. Finally, when the incremental value of the new product is more uncertain, consumers are more willing to purchase the current product because of the "option" value of the trade-in programs and thus trade-in programs can be more beneficial to the firm in this case.
KW - Consumer Behavior
KW - Decision Analysis
KW - Marketing and Manufacturing Interfaces
KW - Pricing
UR - http://www.scopus.com/inward/record.url?scp=84930403415&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84930403415&partnerID=8YFLogxK
U2 - 10.1111/deci.12139
DO - 10.1111/deci.12139
M3 - Article
AN - SCOPUS:84930403415
VL - 46
SP - 565
EP - 595
JO - Decision Sciences
JF - Decision Sciences
SN - 0011-7315
IS - 3
ER -