Dynamic Pricing under Downward Sloping Demands

50 Pages Posted: 14 Dec 2023 Last revised: 1 Jun 2024

See all articles by Jose Carrasco

Jose Carrasco

Escuela de Negocios, Universidad Adolfo Ibañez

Allan Hernandez-Chanto

University of Queensland - School of Economics

Joel Rabenhorst

University of Queensland - School of Economics

Date Written: June 1, 2024

Abstract

We explore the problem of a monopolist selling a stock of a divisible good to a stream of heterogeneous buyers who arrive stochastically. Buyers' demands are random and downward sloping, leading the seller to trade-off price and quantity as well as revenue and option value. We show that the seller uses a marginalist approach by equalizing marginal revenue to an endogenous marginal cost that reflects lost optionality. We also characterize optimal selling behavior and show that when holding less stock, the seller becomes less willing to sell and charges higher prices for smaller quantities. However, she also exercises less market power unless stock is low enough. This behavior remains optimal when the seller perfectly discriminates and uses dynamic two-part tariff pricing. We also analyze the welfare implications of pricing and the effect of search costs.

Keywords: Dynamic pricing, Heterogeneous buyers, Intertemporal choice, Multi-unit search, Two-part tariff

JEL Classification: C61, D25, D42, D83

Suggested Citation

Carrasco, Jose and Hernandez-Chanto, Allan and Rabenhorst, Joel, Dynamic Pricing under Downward Sloping Demands (June 1, 2024). Available at SSRN: https://ssrn.com/abstract=4637247 or http://dx.doi.org/10.2139/ssrn.4637247

Jose Carrasco

Escuela de Negocios, Universidad Adolfo Ibañez ( email )

2640, Peñalolen
Santiago
Chile

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

Allan Hernandez-Chanto

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Joel Rabenhorst (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, Queensland 4072
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
83
Abstract Views
317
Rank
565,660
PlumX Metrics