Dynamic Pricing of Limited Inventories When Customers Negotiate

Although take-it-or-leave-it pricing is the main mode of operation for many retailers, a number of retailers discreetly allow price negotiation when some haggle-prone customers ask for a bargain. At these retailers, the posted price, which itself is subject to dynamic adjustments in response to the pace of sales during the selling season, serves two important roles: (i) it is the take-it-or-leave-it price to many customers who do not bargain, and (ii) it is the price from which haggle-prone customers negotiate down. In order to effectively measure the benefit of dynamic pricing and negotiation in such a retail environment, one must take into account the interactions among inventory, dynamic pricing, and negotiation. The outcome of the negotiation (and the final price a customer pays) depends on the inventory level, the remaining selling season, the retailer's bargaining power, and the posted price. We model the retailer's dynamic pricing problem as a dynamic program, where the revenues from both negotiation and posted pricing are embedded in each period. We characterize the optimal posted price and the resulting negotiation outcome as a function of inventory and time. We also show that negotiation is an effective tool to achieve price discrimination, particularly when the inventory level is high and/or the remaining selling season is short even when implementing negotiation is costly.http://deepblue.lib.umich.edu/bitstream/2027.42/85781/1/1159_Ahn.pd

Aggressive Monetization: Why the Pay for Currency Model is Dominating the iOS App Store Today

The Apple iOS App Store has only been around for 5 years, and yet it has completely changed the way that mobile software is distributed. In this brief period, the online marketplace has seen dramatic shifts in the most successful strategies used by iOS software developers and, more specifically, game developers to gain revenue. As of March 14th 2014 fifteen of the twenty top-grossing iOS apps feature some form of in-app currency that users may purchase with real money, eighteen are mobile video games, and all twenty of these apps are free to download. This paper explores a new business strategy, the pay for currency model, which has been highly successful in generating huge profits from App Store software distribution. This paper first builds on existing economic models for network externalities to include non-paying customers and provides an argument for how iOS games with in-app currencies can achieve a form of first-degree price discrimination

Benefits of Collaboration in Capacity Investment and Allocation

This paper studies capacity collaboration between two (potentially competing) firms. We explore the ways that the firms can collaborate by either building capacity together or sharing the existing capacity for production. We consider cases where the two firms' products are potential substitutes and also where the firms' products are independent. We find that a firm can benefit from collaboration even with its competitor. Moreover, the firms do not have to jointly make the production decisions to realize the benefits of collaboration. We consider a model where firms build capacity before demand is realized and make production decisions after they receive a demand signal. They can potentially collaborate in jointly building capacity and/or in exchanging capacity once they receive their demand signals. Interestingly, we find that having firms compete at the production stage can result in firms deciding to build less overall capacity than if they coordinated capacity investment and production. Also, we find that though collaboration in capacity investment is bene cial, collaboration in production using existing capacity is often more beneficial. The benefits of collaboration is largest when competition is more intense, demand is more variable and cost of investment is higher.http://deepblue.lib.umich.edu/bitstream/2027.42/94207/1/1179_HAhn.pd

Dynamic Pricing with Point Redemption

Many sellers allow consumers to pay with reward points instead of cash or credit card. While the revenue implications of cash purchases are transparent, the implication of reward sales is not trivial, when a firm that issues points is not a seller. In this case, a seller receives a compensation from the point issuer when a consumer purchases the good with points. We examine how reward sales influence a seller's pricing and inventory decisions. We consider a consumer who can choose to pay with cash or points based on reservation price, point balance, and the perceived value of a point. Then, we incorporate this into a pricing model where a seller earns revenues from both cash and reward sales. In contrast to an intuition that reward sales will increase sales and revenue, we show that the effect of reward sales on the seller's price is non-trivial as the seller could either add a premium or discount depending on the inventory level, time, and the reimbursement rate. Furthermore, such price adjustments can attenuate the optimal mark-up or mark-down level, and reduce the price fluctuation caused by inventory level and remaining time. We investigate settings where the seller has different operational controls over reward sales and find that allowing reward sales is still better even when the revenue from the reward sales is smaller than the cash sales. We also find that a seller with an ability to control availability (i.e., allow a reward sale or not) can achieve a revenue similar to the revenue of a seller with an ability to change point requirements and price.https://deepblue.lib.umich.edu/bitstream/2027.42/142796/1/1377_Ahn.pd

Fixed vs. Flexible Pricing in a Competitive Market

We study the selection and dynamics of two popular pricing policies—fixed price and flexible price—in competitive markets. Our paper extends previous work in marketing, for example, Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible noneconomic aspects of bargaining. We construct and analyze a competitive search model, which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that fixed and flexible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More specifically, if customers dislike haggling, then fixed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are offered, and the unique equilibrium exhibits full segmentation: haggler customers avoid fixed-price firms and exclusively shop at flexible firms, whereas nonhaggler customers do the opposite. We also find that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario in which market demand goes through periodic ups and downs and find that equilibrium prices remain mostly stable despite significant fluctuations in demand. This finding suggests a plausible competition-based explanation for the stability of prices