Joint Pricing Strategies of Multi-Product Retailer with Reference-Price and Substitution-Price Effect

Previous studies on the multi-period pricing problem indicate that in addition to products’ retail prices, the reference price has an important effect on consumers’ demand. We conduct regression analysis on real transaction data of fruit. The empirical results show that R square is 0.777 in the regression results among retail price, reference price and consumers’ demand. Furthermore, we add substitution price as a new variable in the regression equation, which increases the R square to 0.811. It implies that substitution price is also an important factor affecting consumers’ demand. Inspired by the empirical results, this paper discusses the effects of both reference price and substitution price on the optimal pricing strategies in the scenario that one retailer sells two substitutable products during two consecutive selling periods. We incorporate the reference price and the substitution price into the demand function and build a two-stage pricing model. A backward induction method is used to calculate the analytic solutions. The results indicate that products selling period can be divided into two stages − the new arrival stage and the sales promotion stage. In the new arrival stage, retailers should adopt the high price strategy to raise consumers’ reference prices and the optimal price increases as substitution price rises; in the sales promotion stage, the retailer should choose the low-price promotion strategy to sell out all products for maximizing the total profit.