Product and Price Competition with Satiation Effects

• Authors: Felipe Caro;Victor Martínez-de-Albéniz
• Venue: Management Science
• Year: 2012

Consumers become satiated with a product when purchasing too much too quickly. How much is too much and how quickly is too quickly depends on the characteristics of the product relative to the time interval between consumption periods. Knowing that, consumers allocate their budget to products that generate less satiation effects. Retailers should then choose to sell products that induce minimal satiation, but usually this is operationally more costly. To study this trade-off, we provide an analytical model based on utility theory that relates customer consumption to price and satiation, in the context of multiple competing retailers. We determine the purchasing pattern over time and provide an explicit expression to determine the consumption level in steady state. We derive market shares and show that they take the form of an attraction model in which the attractiveness depends on price and product satiation. We use this to analyze the competition between firms that maximize long-term average profit. We characterize the equilibrium under three scenarios: (i) price-only competition, (ii) product-only competition, and (iii) price and product competition. The results reveal the interplay between a key marketing lever (price) and the firm's ability to offer products that generate less satiation. In particular, we show that when a firm becomes more efficient at reducing satiation, its competitor may benefit if competition is on product only, but not if it is on price and product. We also find that when satiation effects are not managed, a firm's profit may be significantly reduced while a strategic competitor can largely benefit. This paper was accepted by Yossi Aviv, operations management.