The rational effect of price promotions on sales and consumption
Management Science
Rational shopping behavior and the option value of variable pricing
Management Science
Markov Decision Processes: Discrete Stochastic Dynamic Programming
Markov Decision Processes: Discrete Stochastic Dynamic Programming
The Decomposition of Promotional Response: An Empirical Generalization
Marketing Science
Dynamic Mechanism Design for Online Commerce
Operations Research
Intertemporal Pricing with Strategic Customer Behavior
Management Science
Strategic Capacity Rationing to Induce Early Purchases
Management Science
Manufacturing & Service Operations Management
Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers
Manufacturing & Service Operations Management
Preface to the Special Issue on Computational Economics
Operations Research
The Value of Product Variety When Selling to Strategic Consumers
Manufacturing & Service Operations Management
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We study a dynamic pricing problem for a class of products with stable consumption patterns (e.g., household items, staple foods). Consumers may stock up the product at current prices for future consumption, but they incur inventory holding costs. We model this situation as a dynamic game over an infinite time horizon: in each period, the seller sets a price, and each consumer chooses how many units to buy. We develop a solution methodology based on rational expectations. By endowing each player with beliefs, we decouple the dynamic game into individual dynamic programs for each player. We solve for the rational expectations equilibrium, where all players make optimal dynamic decisions given correct beliefs about others' behavior. In equilibrium, the seller may either charge a constant fixed price or offer periodic price promotions at predictable time intervals. We show that promotions are useful when frequent shoppers are willing to pay more for the product than are occasional shoppers. We also develop several model extensions to study the impact of consumer stockpiling on the seller's inventory, production, and rationing strategies.