Groupe d’études et de recherche en analyse des décisions

G-94-05

A Leader-Follower Dynamic Game of New Product Diffusion

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The objective of this paper is to study optimal pricing strategies in a duopoly, under an asymmetric information structure, where the appropriate solution concept is the feedback Stackelberg equilibrium. In order to take into account effects such as imitation (e.g. work-of-mouth) and saturation, the demand (state equation) is assumed to depend on past cumulative sales, on market potential and on both players' prices. We assume also that the unit production cost decreases with cumulative production (learning effects). Each player maximizes his total discounted profit over the planning horizon. The problem is formulated as a two-player discrete-time-finite-horizon game. Existence results are first obtained under rather mild conditions. Since the solution of this problem is intractable by analytical methods, we use a numerical approach. Thus, we design a numerical algorithm for the computation of feedback Stakelberg equilibria and use it to obtain strategies in various representative cases. The numerical results presented are intented to give some insights into the optimal pricing strategies in the context of an asymmetrical feedback information structure.

, 33 pages