On Dynamic Pricing
47 Pages Posted: 7 Dec 2019 Last revised: 26 Jan 2020
Date Written: January 24, 2020
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
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