The Value of Observability in Dynamic Pricing

26 Pages Posted: 16 Mar 2020

See all articles by José Correa

José Correa

University of Chile - Engineering Department

Dana Pizarro

University of Chile - Engineering Department

Gustavo Vulcano

Universidad Torcuato Di Tella - School of Business

Date Written: February 20, 2020

Abstract

Research on dynamic pricing has been growing during the last four decades due to its use in practice by a variety of companies as well as the several model variants that can be considered. In this work, we consider the particular pricing problem where a firm wants to sell one item to a single buyer along an infinite time horizon in order to maximize her expected revenue. The firm commits to a price function over an infinite horizon. The buyer has a private value for the item and purchases at the time when his utility is maximized. In our model, the buyer is more impatient than the seller and we study how important is to observe the buyer time arrival in terms of the seller's expected revenue. When the seller can observe the arrival of the buyer, she can make the price function contingent on the buyer's arrival time. On the contrary, when the seller cannot observe the arrival, her price function is fixed at time zero for the whole horizon. The value of observability is defined as the worst case ratio between the expected revenue of the seller when she observes the buyer's arrival and that when the seller does not observe the time when the buyer arrives. Our main result is to prove that in a very general setting, the value of observability is at most 4.911. To obtain this result we fully characterize the observable setting and use this solution to construct a random and periodic price function for the unobservable case.

Keywords: dynamic pricing, mechanism design, strategic consumer, value of observability

Suggested Citation

Correa, José and Pizarro, Dana and Vulcano, Gustavo, The Value of Observability in Dynamic Pricing (February 20, 2020). Available at SSRN: https://ssrn.com/abstract=3541494 or http://dx.doi.org/10.2139/ssrn.3541494

José Correa

University of Chile - Engineering Department ( email )

Republica 701 Santiago
Chile

Dana Pizarro (Contact Author)

University of Chile - Engineering Department ( email )

Republica 701 Santiago
Chile

Gustavo Vulcano

Universidad Torcuato Di Tella - School of Business ( email )

Avda Figueroa Alcorta 7350
Buenos Aires, CABA 1428
Argentina

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