Modeling Cascading Demand: Accounting for the Effects of Captive Consumer Relationships

Abstract

One of the most popular, and apparently profitable, product-mix strategies involves “cascading demand,” where the sale of an initial product locks in an on-going stream of future sales. Locking in customers increases switching costs, thus decreasing the price-elasticity of demand. A firm may take advantage of this by pricing to increase profitability in the short run. However, overpricing products can create resentment and alienate customers in the long run. This paper discusses how to model the “cascading demand” phenomenon in a marketing simulation game, accounting for the both the short- and long-term effects, and addressing the conditions determining their relative impact on performance.