Intertemporal Pricing of New Products: Incentivizing Consumer Learning and Inertia

Abstract

When a new brand is launched, consumers are initially both uncertain of and not inertial to the new brand. Though these barriers may disappear on their own over time, a savvy brand manager who knows the relative importance of both can use relevant marketing levers to increase profits in the long run. This paper studies exactly these barriers and measures their relative effects on the launch of new brands. In particular, I focus on how the new brand's optimal prices are affected intertemporally in order to pin down which effect is larger. I start with evidence that prices for new products are indeed atypically low compared to later in their life cycle and compared to mature products. Motivated by this, I try to isolate the effects of consumer learning and inertia through a simple yet flexible structural model of demand. For simplicity, I limit the consumer learning and inertia processes to only be affected by actual purchases. As a practical example, I estimate this model using data from the yogurt category which includes purchases before and after the entry of Chobani. In counterfactuals, I find optimal prices in scenarios with different parameters for consumer learning or inertia. These counterfactuals reveal that, for Chobani, incentivizing consumer loyalty is the larger motivation for the firm to price low at launch. Though I only estimate and simulate one brand launch, the methodology for studying these relative effects is generally useful for any brand manager seeking to incentivize consumer learning or inertia for new brands.