Time-Varying Price Elasticity in a Service Market with Heterogeneous Customer Valuation
45 Pages Posted: 9 Dec 2018
Date Written: November 4, 2018
The demand for services such as hotels and car rentals, as well as subscription based services such as self-storage and health clubs varies over time. Service providers therefore adopt dynamic pricing schedules aimed to maximize profitability. Doing so successfully requires understanding how price elasticities vary over time. Moreover, these time-varying price elasticities may be heterogeneous across customer segments. Using data from 67 stores of the self-storage industry, we first show that demand fluctuates over time, and across segments. Subsequently, we use a dynamic hierarchical linear model (DHLM) in which we control for price endogeneity to estimate time-varying price elasticities. We find that, on average, high-valuation customers are more price sensitive than low-valuation customers. Over time, as the service gains more adopters, both high- and low-valuation customers become less price sensitive, but this change is quicker for low-valuation customers. This implies that the pricing policy should be to increase price over time for both segments, but at a faster rate for the low-valuation segment. Further, we note considerable heterogeneity in the magnitude of time-varying price elasticities across stores, emphasizing the importance of local price-setting.
Keywords: Service Pricing, Dynamic Pricing, Bayesian Models, Revenue Management, Retailing
JEL Classification: C11, M31
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