Pricing, competitive strategy, consumer temptation and self-control issues, price fairness, gaming platforms, distribution channels, behavioral modeling
Harutyunyan M, Koca E (2025) "Pricing and Design of Pay-to-Win Add-Ons" Forthcoming in Management Science
Abstract: In player-versus-player video games, players' natural desire to win and avoid losing has created an opportunity for game developers to sell "pay-to-win" add-ons, digital items that give buyers a competitive advantage against other players. In this paper, we investigate the pricing and design of a pay-to-win add-on, its effect on the base game and profit implications for the developer. When a large share of the players is less price sensitive and highly willing to buy the pay-to-win add-on, we find that, surprisingly, the developer may prefer not to introduce it. Further, when it is optimal to sell the add-on, the developer designs it to be less (more) powerful in games where players are highly (moderately) sensitive to losing. In practice, the developer may design rewards or penalties in the game to influence players' sensitivities to winning and losing, respectively. Our findings suggest that when selling a pay-to-win add-on, the developer ideally prefers players' loss-sensitivity to be neither too high nor too low, whereas high win-sensitivity tends to benefit the developer. The introduction of a pay-to-win add-on influences the optimal pricing and design of the base game. In particular, the developer decreases the base game price and may even sell it as a freemium. Despite the price reduction, investment in game quality may actually increase. From the players' perspective, our analysis shows that the introduction of a pay-to-win add-on can actually improve player surplus. In an extension of our core model, we show that the developer may prefer to customize player-to-player matching probabilities based on ownership of the pay-to-win add-on, making players who own it more likely to be matched against non-owners. However, such customization is not always optimal, and under some market conditions, the developer may optimally abstain from customizing matching probabilities. In another extension, we show that the developer may benefit from setting a negative price for the base game; counterintuitively, player surplus does not increase from negative pricing.
Harutyunyan M, Narasimhan C (2024) "Don’t hurry, be happy! The bright side of late product release" Marketing Science 43(6):1188-1203
Abstract: When a firm releases its product later than its competitor, the firm loses sales because many consumers prefer to buy the competitor’s product rather than wait for the firm’s product release. Therefore, in the absence of any late-mover advantages, conventional wisdom suggests that competing firms will release their products as soon as possible to avoid losing customers if they were to enter later. But, when the market evolves over time and consumers are forward-looking, we demonstrate that this intuition fails and propose a new explanation for why a firm may strategically release its product later than its competitor. Namely, a firm’s late entry can help alleviate price competition due to some consumers’ decisions to wait for the firm’s product release instead of buying a currently available product. We show that in markets where the growth rate is sufficiently high and differentiation between firms is not too low, the firm’s profit gain from alleviated price competition dominates its profit loss from reduced sales, making the firm better off by releasing its product later than the competitor. Surprisingly, when the fraction of consumers who enter the market relatively early increases, the firm may have even greater incentives to release its product late. Finally, we consider markets where firms are differentiated both horizontally and vertically, with one firm having a higher quality (or stronger brand image) than its competitor. We find that high level of vertical differentiation will induce both high- and low-quality firms to rush to the market, releasing their products in the early period. However, when vertical differentiation is moderately high, the high-quality firm may choose to release late, whereas the low-quality firm will prefer to release its product early.
Amaldoss W, Harutyunyan M (2023) "Pricing of Vice-Goods for Goal-Driven Consumers" Management Science 69(8):4541-4557
Abstract: Research in psychology shows that consumption goals can help consumers avoid excessive consumption of vice goods and the associated long-term harm. In this paper, we propose a model of self-control with consumption goals and examine how goals moderate the behavior of consumers and the firm's strategy. We find that consumers' personal goals lead to a lower price for a less unhealthy product, but a higher price for a more unhealthy product. Furthermore, even though personal goals reduce the sales of a product, the firm can be better off if consumers have goals rather than no goals. The improvement in the firm's profits need not be at consumers' expense. In fact, consumer welfare increases with personal goals. In some contexts, consumption is not driven by personal goals but shaped by social norms, such as the advice of experts or social groups. We find that unlike personal goals, normative goals make consumers less sensitive to price and do not always improve consumer welfare. Furthermore, normative goals can hurt the firm's profits in contexts where personal goals could improve profits. Finally, we show that our framework with dynamically inconsistent preferences yields results that are consistent with alternative formulations of consumer self-control problems, such as the dual-self model of Thaler and Shefrin (1981) and the costly self-control model of Gul and Pesendorfer (2001).
Diao W, Harutyunyan M, Jiang B (2023) "Consumer fairness concerns and dynamic pricing in a channel" Marketing Science 42(3):569-588
Abstract: The extant literature has shown that when a firm increases its price due to increased demand or consumer valuation, some consumers may have fairness concerns and experience psychological disutility when buying the firm’s product. This paper provides a two-period model to study the effects of consumers’ fairness concerns on firms’ dynamic pricing strategies and profits in a channel. Our analysis reveals a strategic link between the two periods—the retailer has a cost-reduction incentive of lowering its first-period price to induce the manufacturer to reduce the wholesale price in the second period. When the retailer’s cost-reduction incentive prevails, in equilibrium, the retail price stays unchanged while the wholesale price decreases over time. Hence, our results provide an alternative explanation for the empirical observation that retail prices typically do not decrease when wholesale prices do (Anderson et al. 2015). Further, we find that a higher demand increase in the second period can lead to a decrease in both wholesale and retail prices. Importantly, we show that consumer fairness concerns can result in a win-win outcome for the manufacturer and the retailer, which suggests that firms may prefer not using tactics such as price framing to alleviate fairness concerns.
Harutyunyan M, Jiang B (2019) "The bright side of having an enemy” Journal of Marketing Research 56(4): 679-690
Abstract: Conventional wisdom suggests that more intense competition will lower firms’ profits. The authors show that this may not hold in a channel setting with exclusive retailers. They find that a manufacturer and its retailer can both become worse off if their competing manufacturer and retailer with quality-differentiated products exit the market. Put differently, in a channel setting, more intense competition can be all-win for the manufacturer, the retailer, and the consumers. Interestingly, a high-quality manufacturer can benefit from an increase in its competitor’s perceived quality (e.g., due to favorable product reviews from consumers or third-party rating agencies). In other words, a manufacturer may prefer a strong rather than a weak enemy, and the manufacturer can have an incentive to help its competitor improve product quality or remain in the market. Furthermore, the authors show that a multiproduct monopolist manufacturer with an exclusive retailer may make higher profits by spinning off a product into a competing manufacturer that has its own retail channel, even without accounting for any proceeds from the spinoff.
Harutyunyan M, Jiang B (2017) “Why keep your product value secret from competitor’s customers?” Journal of Retailing 93(3): 382-399
Abstract: Customers can sometimes learn unanticipated or hidden use value of a firm’s product whereas the non-customers remain uninformed about that extra value. A monopolist will increase its profit by informing the non-customers of its product’s hidden value. However, our analysis reveals that this may not be true when the firm faces competition in the market—the firm may actually make a higher profit if it keeps its hidden value secret from its competitor’s customers even if advertising to inform those customers is costless. This is because no advertising leads to information heterogeneity among consumers about the existence of the firm’s hidden value, which gives an incentive for both firms to continue targeting their own existing customers rather than poaching each other’s customers, alleviating price competition and increasing firms’ profits. This beneficial strategic effect of keeping some product value secret from the competitor’s customers can persist even when the firms anticipate the hidden value and compete more aggressively for customers in the early period. Our research suggests that firms can benefit from an “under-promise and over-deliver” strategy if they refrain from communicating their extra value to the competitor’s customers. Moreover, positive word of mouth about a firm’s product will not necessarily benefit the firm and can in fact make all firms worse off.