Dynamic Pricing Based on Strategic Consumers and Substitutes in a Duopoly Setting

Based on the rational strategic consumers, we construct a dynamic game to build a two-period dynamic pricing model for two brands of substitutes which are sold by duopoly. The solution concept of the dynamic game is Nash equilibrium. In our model, consumers have been clearly segmented into several consumption classes, according to their expected value of the products. The two competing firms enter a pricing game and finally reach the state of Nash equilibrium. In addition, decision-making process with only myopic consumers existing in the market is analyzed. To make the paper more practical and realistic, the condition, in which the myopic and strategic consumers both exist in the market, is also considered and studied. In order to help the readers understand better and make it intuitively more clearly, a numerical example is given to describe the influence of the main parameters to the optimal prices. The result indicates that, to maintain the firms’ respective optimal profits, the prices of the products should be adjusted appropriately with the changes of product differentiation coefficient.