Contingent Preannounced Pricing Policies with Strategic Consumers

Abstract

Companies in diverse industries have to decide the pricing policy of their inventory over time. This decision becomes particularly complex when customers accommodate their purchase decision in the hope of future discounts and promotions. With such uncertainty, many of these customers may end up not buying even when the price decreases, leaving a substantial amount of unsold items and reducing the firm’s profitability. Recent studies show that a way to mitigate this negative effect caused by strategic consumers is to use a posted or preannounced pricing policy. With that policy, firms commit to a price path that consumers use to evaluate their purchase timing decision. In this paper, we propose a general class of contingent preannounced pricing policies and derive the corresponding equilibrium properties. Firms using this policy commit to a preannounced price path that is, in addition, contingent on the available inventory. We present a two-period model, with a monopolist selling a fixed inventory of a good. Given a menu of prices specified by the firm, arriving customers observe the price path and decide to buy now, wait until next period, or not to buy. The firm determines the set of prices that maximize revenues. The solution to this problem requires the concept of equilibrium among the seller and the buyers. We show existence of equilibrium and uniqueness when only one unit is on sale. However if multiple units are offered, we show that multiple equilibria may arise. We conduct a computational study of different pricing schemes which shows the better performance of the proposed contingent preannounced policy. The source of the improvement comes from the use of the proposed pricing policy as a barrier to discourage strategic waiting and a discrimination tool for those customers waiting.

Keywords: Pricing, Announced Discounts, Strategic Consumers