Competitive Markovian Pricing

48 Pages Posted: 8 Feb 2023 Last revised: 21 Mar 2024

See all articles by Haokun Du

Haokun Du

University of Texas at Dallas - Naveen Jindal School of Management

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management

Elena Katok

University of Texas at Dallas

Date Written: February 5, 2023

Abstract

Problem definition: Dynamic pricing is a popular price-discrimination strategy in retail; however, it is often undermined by customers’ strategic waiting behavior. One tactic utilized by retailers to deter strategic waiting is to offer price discounts at random intervals. This phenomenon has been studied in the recent Markovian-pricing literature in single-retailer settings. In this paper, we extend the study to a competitive setting where two retailers offer random price discounts for incoming customers, and also investigate the impact of customer loyalty in this setting.
Methodology/results: We perform an equilibrium analysis of a competitive Markovian-pricing model with loyal and opportunistic customers and recover a key insight from the single-retailer Markovian-pricing litera- ture that the retailers should offer flash discounts that last only for an instant. Surprisingly, we also find that a larger proportion of opportunistic customers at both or each of the retailers may increase both retailers’ profits when they engage in competitive Markovian pricing.
Managerial implications: Our study extends the support for the use of flash discounts to competitive retail settings. The surprising finding that more opportunistic customers in the market or at each retailer may benefit both competing retailers highlights the unique properties of the competitive Markovian-pricing setting where common wisdom may not apply, and suggests that retailers engaging in competitive Markovian pricing should reconsider their policies regarding price-monitoring and comparison services as well as their efforts to foster customer loyalty.

Suggested Citation

Du, Haokun and Hu, Bin and Katok, Elena, Competitive Markovian Pricing (February 5, 2023). Available at SSRN: https://ssrn.com/abstract=4349019 or http://dx.doi.org/10.2139/ssrn.4349019

Haokun Du

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Bin Hu (Contact Author)

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Elena Katok

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

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