On Dynamic Pricing

47 Pages Posted: 7 Dec 2019 Last revised: 26 Jan 2020

See all articles by Ilia Krasikov

Ilia Krasikov

Pennsylvania State University

Rohit Lamba

Pennsylvania State University - College of the Liberal Arts

Date Written: January 24, 2020

Abstract

In the sale of many timed goods such as airline tickets, hotel booking and concert seats, the analyst observes time and price of sale. This paper builds a theory of dynamic pricing which helps the analyst rationalize these observables. The main friction here is private and evolving valuation of the buyer prior to the date of consumption. A combination of membership fee and continuously increasing prices induces a threshold response from the buyer. This pricing mechanism achieves the deterministic global optimum. It shows how to use timing of purchase as an endogenous criterion of market segmentation, and in the process solves a hitherto outstanding dynamic mechanism design problem. The tools developed are shown to be useful in thinking about refund contracts, stochastic pricing, and dynamic incentives beyond the one-shot deviation principle.

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

JEL Classification: L11, L12, D82, D86

Suggested Citation

Krasikov, Ilia and Lamba, Rohit, On Dynamic Pricing (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=3491015 or http://dx.doi.org/10.2139/ssrn.3491015

Ilia Krasikov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Rohit Lamba (Contact Author)

Pennsylvania State University - College of the Liberal Arts ( email )

University Park, PA 16802-3306
United States

HOME PAGE: http://www.rohitlamba.com

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