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Dynamic Pricing in a Distribution Channel in the Presence of Switching Costs

We advance the literature on dynamic oligopoly pricing models in the presence of switching costs by additionally modeling the strategic pricing role of the retailer within the distribution channel. In doing this, we study the relative dynamic pricing implications – representing the harvesting versus investing incentives of how current price for a brand must optimally take into account, respectively, past versus future demand for the brand – of inertial demand separately for brand manufacturers (who set wholesale prices) versus the retailer (who sets retail prices). We estimate our structural econometric model using brand-level demand and retail prices in the cola market. We find that in our data the retailer only has harvesting incentives. Among the manufacturers, however, the harvesting incentive dominates for the more preferred brand while the investing incentive dominates for the less preferred brand. We perform three counterfactual simulations by varying consumers’ price sensitivity, inertia and brand preferences.