We model the temporal pricing strategies for two firms with asymmetric costs and differing market power (i.e. big-box retailer versus smaller local merchant). A firm’s demand is a function of its price, a reference price and its competitor’s price. Price effects may be asymmetric, i.e. consumers respond differently if they perceive a good to be over-priced versus underpriced. We derive analytical results for optimal prices. We show through a series of numerical examples under what settings firms choose various pricing strategies as well as profit implications for firms with differing costs.
Anderson, C. K., Rasmussen, H., & MacDonald, L. (2005). Competitive pricing with dynamic asymmetric price effects [Electronic version]. Retrieved [insert date], from Cornell University, School of Hotel Administration site: http://scholarship.sha.cornell.edu/articles/443