Title
Optimal pricing of a conspicuous product during a recession that freezes capital markets Optimal pricing of a conspicuous product during a recession that freezes capital markets
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Economics
Source (journal)
Journal of economic dynamics and control. - Amsterdam
Volume/pages
35(2011) :1 , p. 163-174
ISSN
0165-1889
ISI
000285227300011
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper considers the problem of how to price a conspicuous product when the economy is in a recession that disrupts capital markets. A conspicuous product in this context is a luxury good for which demand is increasing in brand image. Brand image here means the ability of a consumer to impress observers by conspicuously displaying consumption of the good. Brand image is built up when the good is priced high enough to make it exclusive, and eroded if the good is discounted. Recession is modeled as having two effects: it reduces demand and it freezes capital markets so borrowing is not possible. In pricing the conspicuous product the firm faces the following trade-off. Reducing price helps maintain sales volume and cash flow in the face of reduced demand, but it also damages brand image and thus long-term demand. The paper analyzes the firm's pricing policy facing scenarios of mild, intermediate and severe recessions, while taking the threat of bankruptcy into account. For an intermediate recession the optimal solution is history-dependent. The results have implications for policy interventions in capital markets and for timing of mergers and acquisitions.
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