Optimal Pricing with Speculators and Strategic Consumers

33 Pages Posted: 2 Aug 2009

See all articles by Xuanming Su

Xuanming Su

University of Pennsylvania - Operations & Information Management Department

Date Written: July 1, 2009

Abstract

This paper studies a monopolist firm selling a fixed capacity. The firm sets a price before demand uncertainty is resolved. Speculators may enter the market purely with the intention of resale, which can be profitable if demand turns out to be high. Consumers may strategically choose when to purchase, and they may also choose to purchase from the firm or from the speculators. We characterize equilibrium prices and profits and analyze the long run capacity decisions of the firm. There are three major findings. First, the presence of speculators increases the firm's expected profits even though the resale market competes with the firm. Second, by facilitating resale, the firm can mimic dynamic pricing outcomes and enjoy the associated benefits while charging a fixed price. Third, speculative behavior may generate incentives for the seller to artificially restrict supply and thus may lead to lower capacity investments. We also explore several model extensions that highlight the robustness of our results.

Keywords: dynamic pricing, speculation, resale, strategic customer behavior, competition

JEL Classification: D40, L11, M21

Suggested Citation

Su, Xuanming, Optimal Pricing with Speculators and Strategic Consumers (July 1, 2009). Available at SSRN: https://ssrn.com/abstract=1441533 or http://dx.doi.org/10.2139/ssrn.1441533

Xuanming Su (Contact Author)

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

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