A Two-stage Pricing Strategy Considering Learning Effects and Word-of-Mouth

TL;DR

This paper develops a two-stage pricing strategy for electronic products that accounts for learning effects, word-of-mouth, and warranty impacts, providing theoretical proofs for optimal timing and pricing to maximize profit.

Contribution

It introduces a novel two-stage pricing model incorporating learning effects, word-of-mouth, and warranty considerations, with proven existence and uniqueness of optimal strategies.

Findings

Price cuts are mainly driven by learning effects.

External factors like customer elasticity have divergent impacts on profit.

Warranty can increase profits by approximately 10%.

Abstract

This paper proposes a two-stage pricing strategy for nondurable (such as typical electronics) products, where retail price is cut down at certain time points of the product lifecycle. We consider learning effect of electronic products that, with the accumulation of production, average production cost decreases over time as manufacturers get familiar with the production process. Moreover, word-of-mouth (WOM) of existing customers is used to analyze future demand, which is sensitive to the difference between the actual reliability and the perceived reliability of products. We theoretically prove the existence and uniqueness of the optimal switch time between the two stages and the optimal price in each stage. In addition, warranty as another important factor of electronic products is also considered, whose interaction with word-of-mouth as well as the corresponding influences on total profit are analyzed. Interestingly, our findings indicate that (1) the main reason for manufacturers to cut down prices for electronic products pertains to the learning effects; (2) even through both internal factors (e.g., the learning effects of manufacturers) and external factors (e.g., the price elasticity of customers) have impacts on product price, their influence on manufacturer's profit is widely divergent; (3) generally warranty weakens the influence of external advertising on the reliability estimate, because warranty price only partially reflects the actual reliability information of products; (4) and the optimal warranty price can increase the profits for the manufacturer by approximately 10%.