First mover advantage in launch of platform based variants: A leader-follower game with upper bound on prices

Product choice and pricing are critical decisions taken by firms while launching new products. Firms need to consider the effect of competition while taking the above decisions. Extensive literature is available for pricing, positioning and launch sequence determination of differentiated products under competition. But, there is need to understand the leader-follower behaviour of firms with differentiated products. The classical game theoretic models do not consider bounds on prices. Hence, applying these models for product choice and pricing decisions in a real-life industrial setting may result in infeasible product choices and generate misleading results. To overcome this gap between theory and practice, we develop game theoretic models for sequential decision making by two firms using reservation price as upper bound on prices by formulating it as a quadratic programming problem. Our approach generates interesting insights on the competitive behavior of firms and shows that leaders can indeed enjoy first-mover advantage under certain conditions.
Key Words: choice of product line, pricing, static and dynamic games, upper bound on prices