Improving Valuation Under Consumer Search: Implications for Pricing and Profits

There is a growing trend in the retail industry to improve customer experience. In this article, we study retailer‐initiated strategies to increase consumer valuation for a product under duopoly. In such a setting, it is possible that a consumer's valuation may be increased by one retailer; however, the consumer may decide to buy the product from the competitor. We consider a two‐stage game where retailers first decide whether to invest in improvements in customer valuation and then engage in price competition. We computationally explore the Nash equilibria in terms of both investment and pricing. We find that in the majority of cases retailers price in a manner to discourage their local customers to buy from the competitor. Next, we focus on the pricing game and theoretically characterize the pricing Nash equilibrium. We find that a retailer could overcome competitive effects by improving consumer valuation beyond a certain threshold. We also find that a retailer who does not invest could benefit from competition in situations where his competitor increases consumer valuation beyond a threshold. Finally, we explore through a computational study the Nash equilibria of the two‐stage game using an alternate model to establish the robustness of our findings.