Value Added to Reservation Prices

Abstract

Suppose a price setting firm kno\vs the distribution of reservation prices its customers have for an existing product. Then suppose the firm introduces a product improvement, and it is able to quantitatively evaluate the increase in performance (e.g. time saved, capacity increased, etc.) for the new product as compared to the original one. The paper provides a general method for pricing the innovation and then focuses on the case of nonnally distributed reservation prices. This approach can explain pricing behavior that standard linear demand curve models do not easily explain. (D42)