Dynamic Price Models for New-Product Planning

The major points established in this paper are: classic marginal pricing is far from optimum for a rapidly evolving business; more appropriate dynamic models can be formulated if one has some feeling for the dominant evolutionary forces in the business environment; and, planning based on the dynamic models can lead to a significant improvement in the long run profit performance. Two developments in the management science literature, the experience curve phenomenon and market-penetration models, are used to illustrate the nature of the dynamic feedback between market and production activity which causes a new growth business to evolve. A specific illustrative example is offered which demonstrates the fact that dynamic price models can be used to test the long run consequences of specific pricing rules or to determine the optimum long run pricing scenario within the context of any constraints which a manager might wish to impose. As opposed to the conventional static theory which emphasizes the instantaneous profit flow, the dynamic models use an appropriately discounted accumulated profit as the major parameter for making value judgments. The specific example considered emphasizes the importance of these ideas for a growth market and suggests that dynamic models can lead to as much as an order of magnitude more profit in the long run than the conventional static theory. More modest, but significant, improvements in long run performance can be obtained in a moderate growth business.