tailieunhanh - The Effects of Sensitization and Habituation in Durable Goods Markets

Price changes and the surpluses or shortages of specific products are often first noted in wholesale channels. The wholesaler to a certain extent determines the market price. If more pork is offered through trade channels than consumers will take at a given price the wholesaler promptly reduces his price bid to packing houses; prices paid for live hogs on the one hand, and for wholesale cuts of pork on the other, will decline. Reduced prices to consumers are thus made possible, and a larger supply of pork will be absorbed. An opposite action will occur,. | The Effects of Sensitization and Habituation in Durable Goods Markets GUILHERME liberal 1 Universidade do Vale do Rio dos Sinos Av. UNISINOS 950 Sao Leopoldo Brazil 93022-000 liberali@ THOMAS S. GRUCA Tippie College of Business University of Iowa Iowa City IA 52242-1994 thomas-gruca@uiowa. edu WALTER M. NIQUE Universidade Federal do Rio Grande do Sul Department of Marketing Rua Washington Luiz 855 Porto Alegre Brazil 90010-460 wmnique@ Abstract We develop a model to study the impact of changes in price or quality sensitivity on the firm as it introduces multiple generations of a durable product where unit costs are a convex function of quality. We incorporate the psychological processes of sensitization and habituation into a model of discretionary purchasing of replacement products motivated by past experience. When price sensitivity decreases with each purchase the firm should offer a higher quality product at a much higher price with each generation. When price sensitivity increases with each purchase habituation skimming is the optimal strategy. When there is sensitization followed by habituation the firm eventually provides higher quality than the market is willing to pay for leading to a steep drop-off in sales and profits. This analysis provides a model of the consumer behavior underlying the phenomenon of performance oversupply identified in the innovation literature. PLEASE DO NOT DISTRIBUTE WITHOUT THE AUTHORS PERMISSION 1 The first author would like to thank CAPES for the funding provided for this research. The Effects of Sensitization and Habituation in Durable Goods Markets 1. Introduction Owning and using a product can change the way consumers feel about it. As consumers gain experience with a new durable product their preferences change. For example a longitudinal study of purchases of rock climbing equipment by Youn Song and MacLahan 2007 finds that brand preferences and price sensitivities evolve as consumers gain more .