Competition, Strategy, and Price Dynamics: A Theoretical and Empirical Investigation

Abstract

The authors explore how competition affects dynamic pricing of new products. Dynamics of diffusion, saturation, and cost reduction due to experience are all considered, with emphasis on the last. The competition among firms is modeled as a dynamic Nash equilibrium in which each firm chooses its optimal dynamic strategy, correctly anticipating its rivals’ strategies. The dynamics of price and market share are characterized for an n-firm oligopoly. Empirical examination of price paths across eight products in the semiconductor components industry shows them to be consistent with analytical results.