A Model for duopoly competition in the durable household goods market

Official URL: http://risc01.sabanciuniv.edu/record=b1083555 (Table of Contents)

In this study, a model for duopoly competition in the durable household goods market is presented. The aim is to investigate the various scenarios and policies on a representative dynamic model. System dynamics is used as the methodology, since it is an adaptive tool that allows for feedback mechanisms. The proposed model consists of six modules: (1) diffusion module, (2) price module, (3) advertising module, (4) word of mouth (WOM) module, (5) cost module, and (6) delivery delay module. Diffusion module consists of innovative demand and imitative demand based on standard Bass model. Advertising effect constitutes the innovative demand whereas WOM constitutes the imitative demand. Price module consists of two sub modules. In the first one, the demand is treated as a function of price, and in the second one price setting process is modeled so a to allow for different pricing strategies. Diminishing returns and accumulated effects build up the advertising module. Conventional WOM effect is modeled in a separate module. The economies of scale and learning curve effects, which may lead to cost decreases during the time horizon, are included in the cost module. Finally, the negative effect of longer delivery times is modeled in the delivery delay module. These modules are replicated for the competitor since a duopoly market structure is investigated. The market consists of four segments and each segment has an associated product. If the product is not available in a segment, then the customers of that segment purchase the product from the first lower segment with product available. The customers of each segment have price levels for the products and a linear demand curve is used for the demand - price relationship. The model allows for different market entry times and new product launchings. The necessary module replications are also performed for the entry of the second products (for both of the firms). In the scenario analysis, various pricing strategies and different product launching times and new product launching decisions both in monopoly and duopoly are tested. The developed model produced valid and consistent results in all scenarios.