Dynamic Pricing in the Presence of Myopic and Strategic Consumers: Theory and Experiment

We investigate retailers’ dynamic pricing decisions in a stylized two‐period setting with possible supply constraints and demand from both myopic and strategic consumers. We present an analytical model and then test its predictions in a behavioral experiment in which human subjects played the role of pricing managers. We find that the fraction of strategic consumers in the market systematically moderates the optimal pricing structure. When this fraction exceeds a certain threshold, the retailer offers relatively small late season markdowns to discourage strategic consumers from waiting and to incentivize them to buy during the early season; otherwise, the retailer offers relatively large markdowns to divert all strategic consumers to the late season, where the majority of revenue is made. Our model analyses suggest that the latter policy is optimal under fairly broad conditions. Our experiment shows that after some significant learning, aggregate behavior is able to approximate the key qualitative predictions from our model analysis, with one notable deviation: in the presence of a mixture of myopic and strategic consumers, subjects act somewhat myopically – they underprice and oversell in the main selling season, which significantly limits their ability to generate revenue in the markdown season.