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Author: Yinhan Meng
Publisher:
ISBN:
Category :
Languages : en
Pages : 96
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Book Description
We study the effect of strategic consumer behavior on pricing, inventory decisions, and inventory release policies of a monopoly retailer selling a single product over two periods facing uncertain demand. We consider the following three-stage two-period dynamic pricing game. In the first stage the retailer sets his inventory level and inventory release policy; in the second stage the retailer faces uncertain demand that consists of both myopic and strategic consumers. The former type of consumers purchase the good if their valuations exceed the posted price, while the latter type of consumers consider future realizations of prices, and hence their future surplus, before deciding when to purchase the good; in the third stage, the retailer releases its remaining inventory according to the release policy chosen in the first stage. Game theory is employed to model strategic decisions in this setting. Each of the strategies available to the players in this setting (the consumers and the retailer) are solved backward to yield the subgame perfect Nash equilibrium, which allows us to derive the equilibrium pricing policies. This work provides three primary contributions to the fields of dynamic pricing and revenue management. First, if, in the third stage, inventory is released to clear the market, then the presence of strategic consumers may be beneficial for the retailer. Second, we find the optimal inventory release strategy when retailers have capacity limitation. Lastly, we numerically demonstrate the retailer's optimal decisions of both inventory level and the inventory release strategy. We find that market clearance mechanism and intermediate supply strategy may emerge as the retailers optimal choice.
Author: Yinhan Meng
Publisher:
ISBN:
Category :
Languages : en
Pages : 96
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Book Description
We study the effect of strategic consumer behavior on pricing, inventory decisions, and inventory release policies of a monopoly retailer selling a single product over two periods facing uncertain demand. We consider the following three-stage two-period dynamic pricing game. In the first stage the retailer sets his inventory level and inventory release policy; in the second stage the retailer faces uncertain demand that consists of both myopic and strategic consumers. The former type of consumers purchase the good if their valuations exceed the posted price, while the latter type of consumers consider future realizations of prices, and hence their future surplus, before deciding when to purchase the good; in the third stage, the retailer releases its remaining inventory according to the release policy chosen in the first stage. Game theory is employed to model strategic decisions in this setting. Each of the strategies available to the players in this setting (the consumers and the retailer) are solved backward to yield the subgame perfect Nash equilibrium, which allows us to derive the equilibrium pricing policies. This work provides three primary contributions to the fields of dynamic pricing and revenue management. First, if, in the third stage, inventory is released to clear the market, then the presence of strategic consumers may be beneficial for the retailer. Second, we find the optimal inventory release strategy when retailers have capacity limitation. Lastly, we numerically demonstrate the retailer's optimal decisions of both inventory level and the inventory release strategy. We find that market clearance mechanism and intermediate supply strategy may emerge as the retailers optimal choice.
Author: Sareh Nabi-Abdolyousefi
Publisher:
ISBN:
Category :
Languages : en
Pages : 83
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Book Description
The objective of this study is to propose novel dynamic pricing mechanisms in the presence of strategic customers using data-driven approaches. Dynamic pricing is the latest trend in pricing strategies and allows optimal response to real-time demand and supply information. Firms often face uncertainties when making pricing decisions. One of the uncertainties often involved is unknown demand. Therefore, businesses seek to optimize revenue while learning demand and reducing the uncertainty involved in setting prices. Understanding consumer decision-making is another crucial aspect of pricing in revenue management. One of the detrimental effects of dynamic pricing is that it invokes a type of behavior in customers that is referred to as forward-looking, or strategic, in revenue management literature. The strategic customer considers future price decreases, and purchases the product if his or her discounted surplus is higher than the immediate surplus. In chapters 1 and 2, we study a retailer who is pricing dynamically to maximize his expected cumulative revenue. We assume that the retailer has no information regarding expected demand nor the type of customers he is facing, whether they are myopic or strategic in their shopping behavior. In the problem of dynamic pricing under demand uncertainty, we face an inherent trade-off between the exploration involved in learning demand and the exploitation which occurs due to revenue maximization. One way of modeling this trade-off is using the multi-arm bandit modeling approach. Many algorithms have been proposed to solve stochastic multi-arm bandit problems. Our focus is on the Thompson Sampling (TS) algorithm which takes a Bayesian approach and was introduced by William R. Thompson. We propose a pricing mechanism called Strategic Thompson Sampling algorithm which is built upon the TS algorithm. Our main contribution in these two chapters is to merge the literature on strategic behavior with the literature on dynamic pricing and demand learning based on the classical multi-arm bandit modeling approach. In these chapters, the retailer is applying our proposed Strategic Thompson Sampling algorithm to learn expected demand in an exploration-versus-exploitation fashion. We start our analysis with a Bernoulli demand scenario in chapter 1 and extend our work to a Normal demand scenario in chapter 2. For both Bernoulli and Normal demand scenarios, we demonstrate numerically that the retailer's long run price offer decreases as the patience level of the strategic customer increases. We further show that the retailer can be better off in terms of his expected cumulative revenue when facing strategic customers. One potential explanation for this observation is the retailer's lower exploration of non-optimal arms in the presence of strategic customers rather than myopic ones. Our intuition is analytically and numerically confirmed for both Bernoulli and Normal demand scenarios. We further provide and compare expected regret bounds on the retailer's expected cumulative revenue for both types of customers. We conclude that the retailer's regret is lower when facing strategic customers as compared to myopic ones. Our objective in chapter 3 is to improve our starting point by building an informative prior and more specifically, an empirical Bayes prior for the Bayesian online learning algorithm that performs binary prediction. The underlying model used in this chapter is a Bayesian Linear Probit (BLIP) model which performs binary classification on a public data set called "Census Income Data Set". Our goal is to build an informative prior using a portion of the training data set and start the BLIP model with the built-in prior rather than the non-informative standard Normal distributions. We further compare the prediction accuracies of the BLIP model with informative and non-informative priors. An empirical Bayes model (Blip with empirical Bayes prior) has been implemented recently in the production system of one of the largest online retailers. The web-lab experiment is currently running.
Author: Mirko Kremer
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
We investigate the impact of strategic consumer behavior on retailers' dynamic pricing decisions. We present a stylized two-period model, and test the equilibrium predictions in a set of behavioral experiments in which human subjects played the role of pricing managers. Our main insight is that relative to equilibrium predictions, subjects underprice in the main selling season. Consequently, they sell more inventory and obtain higher revenue in that season. However, by doing so they significantly limit their ability to generate revenue in the markdown season, which, in the presence of strategic consumers is a major source of revenue.
Author: Yu-Hung Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
This paper studies a firm's optimal dynamic pricing strategies for its new experience goods inmarkets where the distribution of consumers' valuations is ex ante unknown. We examine whetherand how the firm facing information asymmetry and demand uncertainty can signal its high qualityand learn market demand through its pricing strategy. First, we find that a high-quality firm cancredibly reveal its true quality in the early period with either a skimming-pricing strategy or apenetration-pricing strategy under different conditions. Second, though a high-quality firm canbenefit more from learning market demand than a low-quality firm, the high-quality firm may inequilibrium adopt a penetration-pricing strategy to forgo the benefit of learning demand in orderto separate from the low-quality firm, who would adopt a skimming strategy to learn marketdemand. Third, although consumers have higher willing-to-pay for a high-quality product, thehigh-quality firm may in equilibrium charge a lower initial price than the low-quality firm. Fourth,interestingly, the high-quality firm may earn higher profits when its initial price is made underdemand uncertainty than under no uncertainty. Lastly, with perfect social learning (i.e., in the laterperiod, all consumers can learn the firm's quality from earlier customers), the high-quality firmcan in equilibrium signal its quality and learn market demand by adopting a skimming strategy.
Author: Yu-Hung Chen (Economics scholar)
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 122
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Book Description
Chapter 1: Dynamic Pricing and Price Commitment of New Experience Goods An important problem for a firm selling new experience goods is how to credibly signal its high quality. This chapter develops a dynamic model to examine how a firm with a non-durable experience good can signal its quality with dynamic spot-pricing or future-price commitment. I find that when consumers do not believe the firms price commitment to be credible, the high-quality firms most profitable equilibrium outcome is to pool in the first period and separate in the second period. In contrast, when price commitment is credible, the high-quality firm may signal its quality with either a lower-than-first-best first-period price or a higher-than-first-best second-period price. Credible price commitment will benefit the high-quality firm by lowering its signaling cost and hurt the low-quality firm, but can either increase or decrease consumer surplus and social welfare depending on the quality difference between the two types of firms. Chapter 2: Dynamic Pricing of Experience Goods in Markets with Demand Uncertainty This chapter studies a firms optimal dynamic pricing strategies for its experience goods in markets, where the distribution of consumers valuations is ex ante unknown. I find several interesting findings. First, a high-quality firm can signal its quality with either a skimming-pricing strategy or a penetration-pricing strategy in the early period. Second, though a firm with higher quality benefits more from learning market demand, in equilibrium the low-quality firm not the high-quality firm will learn demand if consumers have very different willingness to pay. Third, although consumers have higher willingness to pay for the high-quality product, in the first period the high-quality firm may actually charge a lower price than the low-quality firm. Lastly, the firm may earn higher profits when its initial pricing decision is made under demand uncertainty than under no demand uncertainty. The underlying reason is that the presence of demand uncertainty can sufficiently lower the high-quality firms signaling cost, allowing it to make higher profits by setting future prices based on its high quality. Chapter 3: Who Benefits from Big Data Collected by In-Vehicle Data Recorders? The car insurance market is plagued with problems of adverse selection and moral hazard. In-vehicle data recorders can collect massive amount of information (or "big data") about the drivers risk factors and driving behaviors. This monitoring technology allows the firm to set its insurance premium based on better estimates of the drivers risk factors, alleviating the adverse selection problem. In addition, the firm can charge a premium based on the customers recorded driving behaviors; this helps to reduce the drivers moral hazard. I provide an analytical framework to examine the impact of such monitoring technology on the insurance firms and the consumers. My analysis shows that in a duopoly one firms adoption of the monitoring technology may benefit both firms because of the less severe competition in the market. Finally, I show that if one firm has adopted the monitoring technology, its competitor may have no incentive to adopt that technology even if it is free.
Author: EunMi Lee
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
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Book Description
This study develops a dynamic pricing model with a quality substitutable product, taking into account strategic and myopic consumers. In each of the two periods, the firm can choose between offering a high quality product, a low quality product or both and the corresponding price for the product. Strategic consumers compare current utility with future utility in order to decide the time of purchase and the quality of the product in an attempt to maximize their utilities. Myopic consumers consider only current utility in purchasing of the products. We generate scenarios, prove whether a scenario is feasible and which scenario produces the best profit for the firm. Our result suggests that the firm obtains the best profit when it provides only high quality products in each of the two periods. In other words, the firm does not have to offer quality substitution as intertemporal substitution suffices to maximize the expected profit.
Author: Omar Besbes
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
Many factors introduce the prospect of changes in the demand environment that a firm faces, with the specifics of such changes not necessarily known in advance. If and when realized, such changes affect the delicate balance between demand and supply and thus current prices should account for these future possibilities. We study the dynamic pricing problem of a retailer facing the prospect of a change in the demand function during a finite selling season with no inventory replenishment opportunity. In particular, the time of the change and the postchange demand function are unknown upfront, and we focus on the fundamental trade-off between collecting revenues from current demand and doing so for postchange demand, with the capacity constraint introducing the main tension. We develop a formulation that allows for isolating the role of dynamic pricing in balancing inventory consumption throughout the horizon. We establish that, in many settings, optimal pricing policies follow a monotone path up to the change in demand. We show how one may compare upfront the attractiveness of pre- and postchange demand conditions and how such a comparison depends on the problem primitives. We further analyze the impact of the model inputs on the optimal policy and its structure, ranging from the impact of model parameter changes to the impact of different representations of uncertainty about future demand.
Author: Koray Cosguner
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
We advance the literature on dynamic oligopoly pricing models in the presence of switching costs by additionally modeling the strategic pricing role of the retailer within the distribution channel. In doing this, we study the relative dynamic pricing implications of how current retail and wholesale prices for a brand must optimally take into account past and future demand, respectively, for the brand. Using scanner data from the cola market, we find that while the retailer exploits the benefit of inertial demand by appropriately increasing the retail profit margin, the cost of investing is borne entirely by the manufacturers. We use simulation studies to show how the retailer will lose its ability to leverage the benefits of inertial demand as consumers become more price sensitive. We also show that when inertia of the more price-sensitive customer segment increases, the aggregate welfare of consumers, the retailer, and manufacturers may increase.
Author: International Economic Association
Publisher: MIT Press
ISBN: 9780262690935
Category : Business & Economics
Languages : en
Pages : 588
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Book Description
These contributions discuss a number of important developments over the past decade in a newly established and important field of economics that have led to notable changes in views on governmental competition policies. They focus on the nature and role of competition and other determinants of market structures, such as numbers of firms and barriers to entry; other factors which determine the effective degree of competition in the market; the influence of major firms (especially when these pursue objectives other than profit maximization); and decentralization and coordination under control relationships other than markets and hierarchies.ContributorsJoseph E. Stiglitz, G. C. Archibald, B. C. Eaton, R. G. Lipsey, David Enaoua, Paul Geroski, Alexis Jacquemin, Richard J. Gilbert, Reinhard Selten, Oliver E. Williamson, Jerry R. Green, G. Frank Mathewson, R. A. Winter, C. d'Aspremont, J. Jaskold Gabszewicz, Steven Salop, Branko Horvat, Z. Roman, W. J. Baumol, J. C. Panzar, R. D. Willig, Richard Schmalensee, Richard Nelson, Michael Scence, and Partha Dasgupta
Author: Özalp Özer
Publisher: OUP Oxford
ISBN: 0191634271
Category : Business & Economics
Languages : en
Pages : 976
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Book Description
The Oxford Handbook of Pricing Management is a comprehensive guide to the theory and practice of pricing across industries, environments, and methodologies. The Handbook illustrates the wide variety of pricing approaches that are used in different industries. It also covers the diverse range of methodologies that are needed to support pricing decisions across these different industries. It includes more than 30 chapters written by pricing leaders from industry, consulting, and academia. It explains how pricing is actually performed in a range of industries, from airlines and internet advertising to electric power and health care. The volume covers the fundamental principles of pricing, such as price theory in economics, models of consumer demand, game theory, and behavioural issues in pricing, as well as specific pricing tactics such as customized pricing, nonlinear pricing, dynamic pricing, sales promotions, markdown management, revenue management, and auction pricing. In addition, there are articles on the key issues involved in structuring and managing a pricing organization, setting a global pricing strategy, and pricing in business-to-business settings.
