Dynamic Pricing Competition with Strategic Customers Under Vertical Product Differentiation

Authors:
Qian Liu;Dan Zhang
Affiliations:
Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309
Venue:
Management Science
Year:
2013

Citing 13
Cited 0

Optimal price skimming by a monopolist facing rational consumers

Management Science
Competitive Multi-period Pricing for Perishable Products: A Robust Optimization Approach

Mathematical Programming: Series A and B
A Monopolistic and Oligopolistic Stochastic Flow Revenue Management Model

Operations Research
Strategic Capacity Rationing to Induce Early Purchases

Management Science
Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers

Manufacturing & Service Operations Management
Dynamic Pricing in the Presence of Strategic Consumers and Oligopolistic Competition

Management Science
Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers

Management Science
Optimal Markdown Pricing: Implications of Inventory Display Formats in the Presence of Strategic Customers

Management Science
Consumer-Driven Demand and Operations Management Models: A Systematic Study of Information-Technology-Enabled Sales Mechanisms

Consumer-Driven Demand and Operations Management Models: A Systematic Study of Information-Technology-Enabled Sales Mechanisms
Buy Now and Match Later: Impact of Posterior Price Matching on Profit with Strategic Consumers

Manufacturing & Service Operations Management
Revenue Management with Strategic Customers: Last-Minute Selling and Opaque Selling

Management Science
Dynamic Price Competition with Fixed Capacities

Management Science
The Value of Product Variety When Selling to Strategic Consumers

Manufacturing & Service Operations Management

Quantified Score

Hi-index	0.01

Visualization

Abstract

We consider dynamic pricing competition between two firms offering vertically differentiated products to strategic customers who are intertemporal utility maximizers. We show that price skimming arises as the unique pure-strategy Markov perfect equilibrium in the game under a simple condition. Our results highlight the asymmetric effect of strategic customer behavior on quality-differentiated firms. Even though the profit of either firm decreases as customers become more strategic, the low-quality firm suffers substantially more than the high-quality firm. Furthermore, we show that unilateral commitment to static pricing by either firm generally improves profits of both firms. Interestingly, both firms enjoy higher profit lifts when the high-quality firm commits rather than when the low-quality firm commits. This paper was accepted by Yossi Aviv, operations management.