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Intertemporal Pricing with Strategic Customer Behavior

By Xuanming Su

Abstract

This paper develops a model of dynamic pricing with endogenous customer behavior. In the model, there is a monopolist who sells a finite inventory over a finite time horizon. The seller adjusts prices dynamically in order to maximize revenue. Customers arrive continually over the duration of the selling season. At each point in time, customers may purchase the product at current prices, remain in the market at a cost in order to purchase later, or exit, and they wish to maximize individual utility. The customer population is heterogeneous along two dimensions: they may have different valuations for the product and different degrees of patience (waiting costs). We study this continuous-time game between the seller and the customers, show that it can be reduced into a single-variable nonlinear program, and characterize the equilibrium that maximizes revenue for the seller. We demonstrate that heterogeneity in both valuation and patience is important because they jointly determine the structure of optimal pricing policies. In particular, when high-value customers are proportionately less patient, markdown pricing policies are effective because the high-value customers would still buy early at high prices while the low-value customers are willing to wait (i.e. they are not lost). On the other hand, when the high-value customers are more patient than the low-value customers, prices should increase over time in order to discourage inefficient waiting. Our results also shed light on how the composition of the customer population affects optimal revenue, consumer surplus, and social welfare. Finally, we consider the long run problem of selecting the optimal initial stocking quantity

Topics: customers. Whether firms adopt the most powerful category pricing software o
Year: 2005
OAI identifier: oai:CiteSeerX.psu:10.1.1.133.9218
Provided by: CiteSeerX
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