Operations, Information and Decisions Papers

Document Type

Journal Article

Date of this Version

10-2006

Publication Source

European Journal of Operational Research

Volume

174

Issue

1

Start Page

553

Last Page

580

DOI

10.1016/j.ejor.2004.12.015

Abstract

We consider a problem of dynamically pricing a single product sold by a monopolist over a short time period. If demand characteristics change throughout the period, it becomes attractive for the company to adjust price continuously to respond to such changes (i.e., price-discriminate intertemporally). However, in practice there is typically a limit on the number of times the price can be adjusted due to the high costs associated with frequent price changes. If that is the case, instead of a continuous pricing rule the company might want to establish a piece-wise constant pricing policy in order to limit the number of price adjustments. Such a pricing policy, which involves optimal choice of prices and timing of price changes, is the focus of this paper.

We analyze the pricing problem with a limited number of price changes in a dynamic, deterministic environment in which demand depends on the current price and time, and there is a capacity/inventory constraint that may be set optimally ahead of the selling season. The arrival rate can evolve in time arbitrarily, allowing us to model situations in which prices decrease, increase, or neither. We consider several plausible scenarios where pricing and/or timing of price changes are endogenized. Various notions of complementarity (single-crossing property, supermodularity and total positivity) are explored to derive structural results: conditions sufficient for the uniqueness of the solution and the monotonicity of prices throughout the sales period. Furthermore, we characterize the impact of the capacity constraint on the optimal prices and the timing of price changes and provide several other comparative statics results. Additional insights are obtained directly from the solutions of various special cases.

Copyright/Permission Statement

© . This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

pricing, economics, complementarity, menu costs

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Date Posted: 27 November 2017

This document has been peer reviewed.