Dynamic Pricing on the Internet: Theory and Simulations

Authors:
Benoît Leloup;Laurent Deveaux
Affiliations:
École Nationale Supérieure des Télécommunications de Bretagne, Department of Economics, Technopôle de Brest Iroise BP832, 29285 Brest Cedex, France benoit.leloup@e ...;École Normale Supérieure de Cachan, Research Group on Risk, Information and Decision Theory (GRID), 61, Avenue du Président Wilson, 94235 Cachan Cedex, France laurent.deveau ...
Venue:
Electronic Commerce Research
Year:
2001

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Abstract

As is the case with traditional markets, the sellers on the Internet do not usually know the demand functions of their customers. However, in such a digital environment, a seller can experiment different prices in order to maximize his profits. In this paper, we fit the dynamic pricing model of Rothschild (1974) to match the pricing problem of a Web-store. In this setting, we define the optimization problem of a Web-store and by simulations we study the price dynamics that can appear when all the sellers on a given market follow an optimal pricing policy.