Abstract
Dynamic pricing offers the potential to increase revenues. At the same time, it
creates an incentive for consumers to strategize over the timing of their
purchases; that is, customers may anticipate the firm's price path and try to
optimally time their purchases; they may wait for promotions and markdowns, etc.
What implications does this behavior have for firms in industries with rapid
price changes? What strategies can be used to profitably manage such strategic
consumer behavior?
In this talk, we look at the role product availability plays in influencing such strategic behavior. Specifically, we examine how rationing risk (e.g. deliberately under-stocking products) can be used to creates an incentive for customers to purchase early at higher prices. But when does such a rationing strategy make sense? If it is indeed profitable to create such shortages, what is the optimal amount of rationing risk to create? And how is this decision affected by the risk preferences of customers, the magnitude of discounting and the level of competition a firm faces? How do customers learn about the firm's availability and how does this learning process affect which strategies are most profitable? We present results based on theoretical models of this problem and discuss the implications for observed retail practices.
[This work is joint with Qian Liu, Hong Kong University of Science and Technology.]