On Dynamic Pricing

Abstract

This paper builds a theory of dynamic pricing for the sale of timed goods. The main friction is private and evolving valuation of the buyer prior to the date of consumption, which follows a Poisson process. A combination of membership fee and continuously increasing prices induces a threshold response from the buyer, endogenously segmenting the market along timing of purchase. This pricing mechanism achieves the deterministic global optimum. The tools developed here are shown to be useful in thinking about global incentives in dynamic mechanisms, and mapping dynamic pricing to the classic taxonomy of consumer-producer surplus and deadweight loss.

Keywords: Price Discrimination, Dynamic Pricing, Dynamic Mechanism Design, Optimal Stopping Problem

JEL Classification: L11, L12, D82, D86