Dynamic pricing when customers strategically time their purchase: Asymptotic optimality of a two-price policy

Dynamic pricing when customers strategically time their purchase: Asymptotic optimality of a two-price policy

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Article ID: iaor200962697
Country: United Kingdom
Volume: 8
Issue: 1
Start Page Number: 42
End Page Number: 66
Publication Date: Jan 2009
Journal: Journal of Revenue and Pricing Management
Authors: ,
Keywords: pricing
Abstract:

We study the dynamic pricing problem of a monopolist firm in presence of strategic customers that differ in their valuations and risk preferences. We show that this problem can be formulated as a static mechanism design problem, which is more amenable to analysis. We highlight several structural properties of the optimal solution, and solve the problem for several special cases. Focusing on settings with low risk–aversion, we show through an asymptotic analysis that the ‘two–price point’ strategy is near–optimal, offering partial validation for its wide use in practice, but also highlighting when it is indeed suitable to adopt it.

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