Novel Price Sensitive Demand Model with Empirical Results

Abstract

Demand of commoditized products –for example drinking water and generic pharmaceutical products – depends mainly on price. Therefore, pricing strategy is very important especially for competing suppliers with common retailer. However, although many literatures were studied in pricing strategy, but almost all of those studies did not expand to use empirical data which is very important for applying the findings to real business.     To find the point that both manufacturers and a retailer can maximize their own profit in a supply chain, Game theory principle is used. This paper introduces a new parameter concept, the competition intensity of pricing degree, which is an important parameter that we incorporate in our linear price sensitive demand model in order to make the result more applicable. Moreover, we include a case study to show how the finding can be valuable tools for deciding on pricing policy.

Keywords: Demand Model, Competition intensity of price degree, Bargaining Power, Game Theory, Pharmaceutical