Intertemporal Price Discrimination Via Randomized Pricing

68 Pages Posted: 22 Aug 2018 Last revised: 22 Nov 2019

See all articles by Hongqiao Chen

Hongqiao Chen

Nanjing University - School of Management and Engineering

Ming Hu

University of Toronto - Rotman School of Management

Jiahua Wu

Imperial College Business School

Date Written: November 21, 2019

Abstract

In e-commerce, the price for a (durable) product could fluctuate very frequently. The undesirable but inevitable consequence is that consumers can be trained to time their purchases strategically. In this paper, we study randomized pricing, where the firm randomly varies prices over time, as an alternative dynamic pricing strategy. In particular, we consider a model where a monopolist sells a single product to a market with a constant stream of multiple market segments. The segments are heterogeneous in both their product valuations and patience levels. The firm pre-commits to a price distribution, and in each period, a price is randomly drawn from the chosen distribution. We characterize structural properties of optimal randomized pricing policies and show that under certain conditions that are also used in the literature, the optimal randomized pricing policy boils down to a two-point price distribution of a regular and discount price. Randomized pricing serves as an intertemporal price discrimination mechanism such that customers of higher valuations would buy immediately at the regular price upon arrival, and customers of lower valuations would wait for a promotion. Compared against the optimal cyclic deterministic pricing policy, which is optimal within the strategy space of all deterministic pricing policies, the optimal randomized pricing policy (weakly) dominates the optimal cyclic deterministic pricing policy if the valuation discrepancies among customers are large enough.

Keywords: price discrimination, randomized pricing, strategic consumer behavior, forward-looking consumer, cyclic pricing, Markovian pricing, static pricing

Suggested Citation

Chen, Hongqiao and Hu, Ming and Wu, Jiahua, Intertemporal Price Discrimination Via Randomized Pricing (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3223844 or http://dx.doi.org/10.2139/ssrn.3223844

Hongqiao Chen

Nanjing University - School of Management and Engineering ( email )

Nanjing, 210093
China

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Jiahua Wu

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, SW7 2AZ
United Kingdom
02075949851 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/j.wu

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