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Dynamic Pricing Under Consumer's Sequential Search

53 Pages Posted: 26 Jun 2016 Last revised: 27 Sep 2017

Sajjad Najafi

Ross School of Business, University of Michigan

Chi-Guhn Lee

University of Toronto

Sami Najafi Asadolahi

Santa Clara University - Leavey School of Business

Steve Nahmias

Santa Clara University - Leavey School of Business

Date Written: September 22, 2017

Abstract

We study a firm offering a line of vertically differentiated perishable products with fixed initial inventory over a finite sales season. Consumers arrive at the firm randomly and inspect products sequentially until they find a product to purchase (if any). Consumers evaluate each product in terms of its overall utility revealed to them. Each consumer incurs a positive cost to inspect a product and hence may stop the sequential search without inspecting all the available items. Upon a product's inspection, the utility of the product is known to the consumer, who then decides whether to continue the search by comparing the utility of the best product observed thus far with his reservation utility---namely, the maximum utility the consumer expects to gain if he continues the search one stage further. We formulate the firm's and consumer's problems using stochastic dynamic programming and determine the consumers' optimal search decision, the firm's optimal price to charge for each product at each time and the optimal sequence in which to show the products to consumers. We show that it is optimal for the firm to sequence products in decreasing order of product quality. We show that, in some cases, it is optimal for the firm to increase a product's price over time. This result is in stark contrast to the common result from the literature that prices for perishable products should be reduced over time. However, the fact that a consumer may not be able to see all products during the search can cause the opposite price behavior.

Keywords: Dynamic Pricing; Substitutable Products; Sequential Search; Reservation Utility; Sequencing

Suggested Citation

Najafi, Sajjad and Lee, Chi-Guhn and Najafi Asadolahi, Sami and Nahmias, Steve, Dynamic Pricing Under Consumer's Sequential Search (September 22, 2017). Available at SSRN: https://ssrn.com/abstract=2800370 or http://dx.doi.org/10.2139/ssrn.2800370

Sajjad Najafi

Ross School of Business, University of Michigan ( email )

701 Tappan Ave
Ann Arbor, MI 48109
United States

Chi-Guhn Lee

University of Toronto ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

Sami Najafi Asadolahi (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Steve Nahmias

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

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