This paper examines Single and Dynamic Pricing Policies of two competing firms over two periods in the presence of social influence. Assuming two firms adopt the same pricing policy, we find that, under either pricing policy, firm profits always decrease with the degree of social influence. Firms prefer Dynamic Pricing Policy when social influence is either relatively weak or sufficiently strong (for firms under Dynamic Pricing Policy to set zero prices in the first period). Otherwise, Single Pricing Policy is more preferable. The conclusions are similar when the market size varies over periods, except that Dynamic Pricing Policy is always more profitable if the market size in period 2 is sufficiently large. We have further compared the two pricing policies with Posted Pricing Policy. The results show that Dynamic Pricing Policy dominates when social influence is relatively weak, while Posted Pricing Policy dominates when social influence is sufficiently strong because of the synergy between social influence and the reference price effect. Finally, when each firm freely chooses either Single or Dynamic Pricing Policy, we find that, if the degree of social influence is relatively small, two asymmetric equilibria exist where two firms adopt different pricing policies. If the degree of social influence is very large, however, the unique equilibrium is both firms adopting Dynamic Pricing Policy. These findings provide important implications for firms to make more informed pricing decisions in an increasingly competitive environment with strong social influence.

Introduction

Social influence is defined as “any change which a person’s relations with other people (individual, group, institution or society) produce on his (sic) intellectual activities, emotions or actions” (Dictionary of Personality and Social Psychology (1986, p.328)). It has been found to significantly affect consumer purchase decision. Substantial research has shown that consumers prefer products that are popular among other consumers in the previous selling periods (Hu et al., 2015). This explains why almost all the online shopping websites (e.g., Amazon and Target) update the sales ranking information from time to time to show which product is more popular. Particularly, Amazon adds a “best seller” tag on the product that is very popular. In some websites, they also show the previous sales quantity of each product. For example, the daily deal site, DailyDeal, and eBay both show the sales quantity of their products. Similarly, T-mall and Taobao, the two most famous shopping websites in China, also reveal the sales quantity in the previous month of each product, which will certainly be an important reference for consumers to make purchase decisions. The underlying motivation of displaying the sales quantity information is similar to having “top seller” lists (Parsons et al., 2014). Empirical studies also show that social influence results in the “the rich get richer” phenomenon (Cai et al., 2009; Carare, 2012). Carare (2012) finds that a consumer would like to pay more for a highly ranked product through investigating the sales ranking in Apple’s App Store.