Wen Zhou
In this paper, I offer a new theory for why price reductions take place on a regular basis in some industries. I suggest that the demand for a firm’s product drops over time because of the erosion of consumers’ brand recall, and that price discounts are utilized to boost the diminishing demand. A dynamic model is then constructed to demonstrate the theory for both monopoly and duopoly competition. I show that it is optimal for a monopolist to alternate between a constant high (normal) price and a constant low (discount) price with fixed frequency, and that competing firms offer discounts at the same time in duopoly competition.
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