The effects of brand equity on price strategies: an agent based model

Abstract

Consumers are highly sensible to different price structures and price promotions. Many studies have showed how custÖmers differently respond when prices are split into separate parts, e.g. a regular price and a shipping and handling surcharge. This phenomenon has recently received much more attention because online sales have continuously and substantially increased in the last years and because online sales imply a price partitioning: product price and shipping price. This gives opportunities to online retailers. They can decide whether to apply promotional tactics on both regular prices and on shipping and handling prices. The price partitioning decision becomes more complicated than usual. Retailers have to choose between a free shipping offer strategy and a price partitioning strategy. In the former case they have to decide a single price that includes the shipping cost and in the latter cases they have to choose upon two prices, a price for the item and a price for the shipping. This paper investigates how firms decide which of these two strategies to adopt and how their brand equities affect their decisions. An agent based model is built in order to replicate Gumus et al. (2009) results and to depart from it bringing new insights about market partitioning (how many firms adopt which strategy) and the effects of brand equities.