Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning

57 Pages Posted: 4 Oct 2015

See all articles by Guofang Huang

Guofang Huang

Purdue University

Hong Luo

Harvard Business School - Strategy Unit

Jing Xia

Harvard University

Date Written: September 2, 2015

Abstract

Pricing idiosyncratic products is often challenging because the seller, ex ante, lacks information about the demand for individual items. This paper develops a model of dynamic pricing for idiosyncratic products that features the optimal stopping structure and a seller that learns about item-specific demand through the selling process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the demand information that the dealer obtains through the initial assessment and subsequent learning in the selling process. With the dealer's average net profit per car in the estimation sample being around $1150, the initial assessment is worth around $101, and the subsequent learning in the selling process helps improve the dealer's profit by at least $269. These estimates suggest a potentially high return to taking the "information-based" approach to pricing idiosyncratic products.

Keywords: dynamic pricing, idiosyncratic products, item-specific demand, demand uncertainty, active seller learning, the value of information

JEL Classification: L1

Suggested Citation

Huang, Guofang and Luo, Hong and Xia, Jing, Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning (September 2, 2015). Available at SSRN: https://ssrn.com/abstract=2668838 or http://dx.doi.org/10.2139/ssrn.2668838

Guofang Huang (Contact Author)

Purdue University ( email )

West Lafayette, IN 47906
United States

Hong Luo

Harvard Business School - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States

Jing Xia

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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