Optimal Intertemporal Pricing Strategies for Firms Introducing New Products

Abstract

Firms can significantly improve their performance upon the introduction of a new product by following an intertemporal pricing strategy which predicts the adoption of the product through time. Four reasons for gradual adoption are explored: delayed purchase, awareness, social pressures and informational needs. The firm does better by pricing a straightforward new product at a lower introductory price when the product is quite visible to other potential adopters when an individual adopts. Differences in price-sensitivity among consumers also impact the firm's optimal strategy. Products for which the social relevance varies considerably or for which the average perceived social risk of adoption is high cannot necessarily benefit from a low introductory price. A high initial price which decreases through time is better when consumers are varied in their need for information, when on average, much information is needed and when the information generated by other adopters is forgotten more quickly.