The economics of demonstrations: The effect of competition on demonstration and pricing strategies

Demonstrations of new software products and their equivalents in the automobile industry, i.e., test-drives, are an inherent part of sales efforts. Yet the quality of standard demonstrations has been criticized as being inadequate and, in particular, too short. Heavy competition at the dealer level has been pinpointed as the main reason for short, minimal demonstrations. An analysis of business cases from two industries—automobile and software—indicates that, while competition diminishes demonstration efforts in the automobile industry, it has the opposite effect in the software industry where heavy competition induces demonstration efforts. This paper studies demonstration policies in a monopoly and a duopoly and explores the role of competition and costs of production and demonstration on demonstration strategies in these two market settings. Comparing the set of conditions between the two market settings enables us to determine under which competition will increase (decrease) demonstration intensity.