Skip to main content

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.

This is a preview of subscription content, access via your institution.


  1. 1.

    Connelly, Mary. Test drives make gains in marketing clout. Automotive News, October 16, 2006.

  2. 2.

    According to Horizon (2004), every car buyer visits, on average, 3.1 dealers before purchasing a new car. Annual new-cars sales total around 16.8–17 million cars (Horizon 2004). The average length of a standard test drive is 10 minutes (Kamm 2005). Multiplying these three figures gives 8.73 million h of test drives.

  3. 3.

    Uniform distribution is commonly used in models with risk information and risk reduction tools (e.g., Desai and Purohit 1998; Moorthy 1988; Klemperer 1987).

  4. 4.

    The alternative is to model a dynamic learning curve; however, this would shift the focus to optimizing duration rather than concentrating on the choice of whether or not to demonstrate.

  5. 5.

    The threshold search cost for the case of P D<\( \,\frac{1}{2} \) is given by \( \frac{1}{2} + \frac{1}{2}{\left( {{P^D}} \right)^2} \), and is relevant only for C = 0.

  6. 6.

    In the automobile industry, the average advertising budget constitutes 2.5% to 3.5% of revenues. (McKee 2009).

  7. 7.

    The case of non-balanced producers is much less interesting, as differences in production cost and demonstration cost will shape demonstration policies rather than the net effect of competition.

  8. 8.

    Equilibrium in asymmetric pricing strategies is possible for demonstration costs that are high enough to compensate the producer for its lower market share yet low enough to make demonstration profitable. The requirement of high demonstration costs relative to production costs and, at the same time, low demonstration costs results in very low likelihood (1.3%) of an asymmetric pricing strategy thereby allowing us to assume symmetric pricing strategy without compromising the generality of the results.

  9. 9.

    The dichotomous effect of search cost of the first experience allows assuming that the cost of the first demonstration is zero without affecting the generality of the results. We thank the anonymous reviewer for pointing out this alternative.

  10. 10.

    Welfare analysis, which is available from the author, may provide us with a better understanding of situations wherein consumers' surplus declines (inclines) as a result of demonstration as well as scenarios that result in inclines (declines) in profits. The welfare analysis suggests that for C ≤ \( \frac{1}{2} \), if demonstrations are offered, social welfare is in most instances positive, thus by adding production cost and demonstration cost, we reverse Hahn's finding.

  11. 11.


  1. Anderson, S. P., & Renault, R. (1999). Pricing, product diversity, and search costs: A Bertrand-Chamberlin-Diamond model. RAND Journal of Economics, 30(4), 719–735.

    Article  Google Scholar 

  2. Che, Y. Y. (1996). Customer return policies for experience goods. Journal of Industrial Economics, 44(1), 17–24.

    Article  Google Scholar 

  3. Chintagunta, P., Rao, V., & Vilcassim, N. (1993). Equilibrium pricing and advertising strategies for non-durable experience products in a dynamic duopoly. Managerial and Decision Economics, 14, 221–234.

    Article  Google Scholar 

  4. Consumers Report Organization (2006). Accessed 10 December 2006.

  5. Deneckere, R., Marvel, H. P., & Peck, J. (1996). Demand uncertainty, inventories, and resale price maintenance. The Quarterly Journal of Economics, 111(3), 885–913.

    Article  Google Scholar 

  6. Deneckere, R., Marvel, H. P., & Peck, J. (1997). Demand uncertainty and price maintenance: Markdowns as destructive competition. American Economic Review, 87(4), 621–641.

    Google Scholar 

  7. Derbaix, C. (1983). Perceived risk and risk relievers: An empirical investigation. Journal of Economic Psychology, 3, 19–38.

    Article  Google Scholar 

  8. Desai, P. S., & Purohit, D. (1998). Leasing and selling: Optimal marketing strategies for a durable goods firm. Management Science, 44, 19–34.

    Article  Google Scholar 

  9. Dorfman, R., & Steiner, P. O. (1954). Optimal advertising and optimal quality. American Economic Review, 44, 826–836.

    Google Scholar 

  10. Gale, D. (1988). Price-setting and competition in a simple duopoly model. Quarterly Journal of Economics, 103, 729–740.

    Article  Google Scholar 

  11. Greenberg, K. (2004). Ride-and-drive events bolster Mercedes sales. Brandweek, 45 Jul 26-Aug 2, 28; 9.

    Google Scholar 

  12. Hahn, S. (2005). Allowing a pre-purchase product trial in a duopoly. Economics Letters, 87, 175–179.

    Article  Google Scholar 

  13. Heiman, A., & Muller, E. (1996). Using demonstration in new product diffusion: The theory of demonstration duration. Journal of Marketing Research, 33, 422–430.

    Article  Google Scholar 

  14. Heiman, A., McWilliams, B., & Zilberman, D. (2001). Demonstrations and money-back guarantees: Market mechanisms to reduce uncertainty. Journal of Business Research, 54(1), 71–84.

    Article  Google Scholar 

  15. Horizon (2004).

  16. Irwin, T., & Greenberg, K. (2003). Chrysler, Mercedes take show on the road. Adweek, 44, 17–18.

    Google Scholar 

  17. Kalish, S. (1983). Monopolistic pricing with dynamic demand and production costs. Marketing Science, 31(12), 1569–1585.

    Google Scholar 

  18. Kamm, B. Odometer hits 30 years. Ward's Dealer Business, April 1, (2005).

  19. Klemperer, P. (1987). Markets with consumer switching costs. Quarterly Journal of Economics, 102(2), 375–394.

    Article  Google Scholar 

  20. Mahajan, V., Muller, E., & Bass, F. (1990). New product diffusion models in marketing: A review and directions for research. Journal of Marketing, 54, 1–26.

    Article  Google Scholar 

  21. McKee, S. (2009). What should you spend on advertising? BusinessWeek, Sales&Marketing, February 10.

  22. Moorthy, K. S. (1988). Product and price competition in a duopoly. Marketing Science, 7(2), 141–168.

    Article  Google Scholar 

  23. Nelson, P. (1974). Information and consumer behavior. Journal of Political Economy, 78, 311–329.

    Article  Google Scholar 

  24. Nizovtsev, D., & Novshek, W. (2004). Money-back guarantees and market experimentation. International Journal of Industrial Organization, 22, 983–996.

    Article  Google Scholar 

  25. Reimer, J. (January 22, 2007). Microsoft offering free Vista “test drive”, ARS Technica

  26. Roberts, J. H., & Lattin, J. M. (1991). Development and testing of a model of consideration set composition. Journal of Marketing Research, 28(4), 429–440.

    Article  Google Scholar 

  27. Roberts, J. H., & Urban, G. L. (1988). Modeling multi-attribute utility, risk, and belief dynamics for new consumer durable brand choice. Management Science, 34(2), 167–185.

    Article  Google Scholar 

  28. Roselius, T. (1971). Consumer ranking of risk reduction methods. Journal of Marketing, 35, 56–61.

    Article  Google Scholar 

  29. Schembari, J. (2007). Test-drive that Bentley? So what’s in it for me? New York Times,

  30. Sunk, C. (2007).

  31. Slotegraff, J. R., & Inman, J. J. (2004). Longitudinal shifts in the drivers of satisfaction with product quality: The role of attribute resolvability. Journal of Marketing Research, XLI, 269–280.

    Article  Google Scholar 

  32. Telser, L. G. (1960). Why should manufacturers want fair trade? Journal of Law and Economics, 3, 86–105.

    Article  Google Scholar 

  33. Tirol, J. (1997). The theory of industrial organization. Cambridge, MA; London, UK: MIT Press.

    Google Scholar 

  34. Urban, G. L., Hauser, J. R., & Roberts, J. H. (1990). Prelaunch forecasting of new automobiles. Management Science, 36(4), 401–421.

    Article  Google Scholar 

  35. Villas-Boas, J. M. (2004). Consumer learning, brand loyalty, and competition. Marketing Science, 23(1), 134–145.

    Article  Google Scholar 

  36. Villas-Boas, J. M. (2006). Dynamic competition with experience goods. Journal of Economics and Management Strategy, 15(1), 37–66.

    Article  Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Amir Heiman.

Additional information

The research benefited from a grant provided by the Davidson Center for Research in Agribusiness, The Hebrew University, Israel.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Heiman, A. The economics of demonstrations: The effect of competition on demonstration and pricing strategies. Mark Lett 21, 351–363 (2010).

Download citation


  • Demonstrations
  • Duopolistic competition
  • Non-price competition
  • Pre-purchase product trial
  • Test-drive