Advertising and Pricing Decisions with Reference Price Effect
Erfeng Zhou, Tinglong Zhang, Lei Ni, and Chang Fang
School of Economics and Management, Anhui Normal University
189 Jiuhua South Road, Wuhu City, Anhui Province 241002, China
Social perception influences product and brand evaluations. Consumers are especially susceptible to reference price effects when they make purchase decisions for a certain product. Meanwhile, the advertising and pricing are the determinable factors that have impact on consumers’ reference price which also are fundamental marketing strategies. Therefore, how to dynamically set advertising and pricing to maximize firms’ profits are essential tasks. We investigate a duopoly market in a mature product category where two firms compete through time using advertising and pricing as their dominated marketing tools. The firms make the advertising and pricing decisions to maximize their own profits in the planning period. The main results of this paper include the following. (i) The optimal retail price and advertising effort are positively correlated to the initial reference price and basic market size. (ii) When the two firms’ initial basic market size are different, the retail price difference is positive correlated to the initial basic market size difference, so is the advertising effort difference. This conclusion will result to that the strong firm is getting stronger and stronger, however, the weak firm is getting weaker and weaker, this is the situation which happen in the e-commerce market, that is winners take all. (iii) The value of the initial reference price can also determines the reference price effect on the consumer demand rate, that is, when the initial reference price is relatively low, the reference price will have a negative effect on the consumers’ demand of both firms in the whole planning period; when the initial reference price is relatively high, the reference price will have a positive effect on the consumers’ demand of both firms in the whole planning period. Whereas, a moderate initial reference price may lead to different effects on demand.
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