Optimal Competitive Pricing and Entry Under Technological Change
Tsai, Dung-Chun
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https://hdl.handle.net/2142/72308
Description
Title
Optimal Competitive Pricing and Entry Under Technological Change
Author(s)
Tsai, Dung-Chun
Issue Date
1992
Doctoral Committee Chair(s)
Monahan, George E.
Department of Study
Business Administration
Discipline
Business Adminstration
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Marketing
Business Administration, Management
Economics, Commerce-Business
Abstract
This research investigates the interactions among three factors: the existing firm's pricing strategy, the potential competitor's entry timing, and technological change. Two research questions are addressed: (1) how does technological change influence both firms' decisions? and (2) how will both firms' decisions affect each other?
To formulate the problem, the General Model is built as a stochastic game that allows both the existing firm (Firm 1) and the potential competitor (Firm 2) to be strategic players. Two state variables that affect both firms' decisions are the effective market potential of the competitive segment and the level of the technology developed by Firm 2. As time passes, the effective market potential of the competitive segment will decrease because of the sales generated by Firm 1; and higher-level technologies will be continuously developed through the R&D effort of Firm 2.
The numerical results of the General Model suggest that Firm 2 is more likely to enter the market when (1) the effective market potential of the competitive segment is relatively large, or (2) the level of the technology developed by Firm 2 is relatively high. Moreover, these two factors have a joint effect. In addition, the results show that Firm 2's entry may not be deterred by a low price charged by Firm 1. Furthermore, in some cases, even though Firm 2's entry can be deterred by Firm 1's low price, Firm 1 can generate more profit by charging a high price than by charging a low price.
Two simple models are developed by modifying the General Model: the Simple Entry Model and the Simple Pricing Model. The former model examines Firm 2's entry decision. The analytical solution supports what we find in the numerical analysis of the General Model. The latter model investigates Firm 1's pricing strategy. The analytical results show that Firm 1's optimal price could be either smaller or larger than the myopic price. In addition, this model integrates the different results of two types of research: two-period pricing and limit pricing. Theoretical contributions and managerial implications of this research are discussed.
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