Abstract:

To encourage repeated purchasing, many innovating firms offer trade-in program. In this context, by constructing a two-stage dynamic game model, this paper analyzes the subgame perfect Nash equilibrium between the firm and strategic consumers, and then studies the optimal pricing strategy. Results show that regardless of pricing strategy adopted, the firm can manipulate different consumer segments through relative pricing position between the old and the new generation of product. When consumers are strategic enough and the salvage value of old generation is high enough, the firm has an incentive to force consumers to buy the old generation in the second period. Otherwise, the firm has an incentive to force consumers to buy the new generation in the second period. In addition, when consumers are not strategic enough and the innovation level of new generation is sufficiently high, the firm is better off using dynamic pricing strategy. Otherwise, preannounced pricing strategy is the optimal choice for the firm.

Key words: Dynamic pricing strategy, Preannounced pricing strategy, Trade-in program, Strategic consumer