Optimal Continuous Pricing with Strategic Consumers

23 Pages Posted: 26 Nov 2014 Last revised: 26 Jun 2015

Luis Briceño

Universidad Tecnica Federico Santa Maria

José Correa

University of Chile - Engineering Department

Andres Perlroth

Stanford Graduate School of Business

Date Written: June 2015

Abstract

An important problem in electronic commerce is that of finding optimal pricing mechanisms to sell a single item when the number of buyers is random and they arrive over time. In this paper we combine ideas from auction theory and recent work on pricing with strategic consumers to derive the optimal continuous time pricing scheme in this situation. blue Under the assumption that buyers are split among those who have a high valuation and those having a low valuation for the item, we obtain the price path maximizing the seller's revenue. This amounts to conclude that, depending on the specific instance it is optimal to either use a fixed price strategy, or to use steep markdowns by the end of the selling season. To complement this optimality result we prove that under a large family of price functions there exists equilibrium for the buyers. Finally, we derive an approach to tackle the case in which buyers' valuation follow a general distribution. The approach is based on optimal control theory and is well suited for numerical computations.

Keywords: Revenue Management, Strategic Consumers, Optimal Pricing

Suggested Citation

Briceño, Luis and Correa, José and Perlroth, Andres, Optimal Continuous Pricing with Strategic Consumers (June 2015). Available at SSRN: https://ssrn.com/abstract=2530677 or http://dx.doi.org/10.2139/ssrn.2530677

Luis Briceño

Universidad Tecnica Federico Santa Maria ( email )

Avenida España 1680
Casilla, Valparaíso 110-V
Chile

José Correa (Contact Author)

University of Chile - Engineering Department ( email )

Republica 701 Santiago
Chile

Andres Perlroth

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Paper statistics

Downloads
161
Rank
147,818
Abstract Views
873