Dynamic Pricing in Declining Demand: A Case of Monopoly

Abstract:     
This paper characterizes dynamic monopoly price patterns when demand declines. Declining demand is caused by the prevalence of a substitutable new product. Under an assumption that myopic consumers never buy an old product once they buy the new one, this study demonstrates a systematic property of the price path. This property illustrates a tradeoff between pricing low to delay the adoption of the new product, but pricing high to exploit consumers who are insensitive to the price of the old product. Comparative statics show how the path is affected by exogenous variables such as the rate of technological advance and consumer-side or firm-side characteristics. In particular, distribution type of consumer's characteristics is a critical factor in alternating price paths.

Number of Pages in PDF File: 39

Keywords: Declining demand, price inelastic demand, dynamic pricing, monopoly, myopic consumers.

JEL Classification: L11, L12, L16

working papers series