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Purchasing Scarce Products Under Dynamic Pricing: An Experimental Investigation

Author

Listed:
  • Vincent Mak

    (Cambridge Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom)

  • Amnon Rapoport

    (A. Gary Anderson Graduate School of Management, University of California, Riverside, Riverside, California 92521)

  • Eyran J. Gisches

    (Department of Management Information Systems, Eller College of Management, University of Arizona, Tucson, Arizona 85721)

  • Jiaojie Han

    (School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, People's Republic of China)

Abstract

Whereas theoretical studies on dynamic pricing typically assume that consumers are either fully strategic or fully myopic, systematic empirical investigations into how consumers behave under dynamic pricing contexts are relatively rare. Focusing on scarce products, we constructed and experimentally tested a two-stage model in which a firm sells a seasonal good under exogenous inventory constraints to a market of strategic buyers. In our experiment, subjects assigned the role of buyers made purchase decisions in response to prices set by an automated seller. We find that equilibrium predictions assuming fully strategic buyers largely accounted for aggregate behavior in the experiment, and the ex post optimal decisions for subjects were overwhelmingly consistent with equilibrium prescriptions. Moreover, subjects tended to become individually more strategic as the session progressed. However, there were also nuanced systematic patterns of deviations from equilibrium that had profit and pricing implications for the seller. First, a nonnegligible minority of subjects exhibited completely myopic buying behavior even with practice. Second, when the product was relatively more scarce, myopic buying had a stronger impact on demand at higher prices; the upshot is that the seller's season-profit-maximizing price could be considerably higher than what would be optimal with fully strategic buyers.

Suggested Citation

  • Vincent Mak & Amnon Rapoport & Eyran J. Gisches & Jiaojie Han, 2014. "Purchasing Scarce Products Under Dynamic Pricing: An Experimental Investigation," Manufacturing & Service Operations Management, INFORMS, vol. 16(3), pages 425-438, July.
    • Handle: RePEc:inm:ormsom:v:16:y:2014:i:3:p:425-438
    DOI: 10.1287/msom.2014.0480
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    References listed on IDEAS

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    13. Ghobadi, Somayeh Najafi- & Bagherinejad, Jafar & Taleizadeh, Ata Allah, 2021. "A two-generation new product model by considering forward-looking customers: Dynamic pricing and advertising optimization," Journal of Retailing and Consumer Services, Elsevier, vol. 63(C).
    14. Atasoy, Ayse Tugba & Harmsen-van Hout, Marjolein & Madlener, Reinhard, 2018. "Strategic Demand Response to Dynamic Pricing: A Lab Experiment for the Electricity Market," FCN Working Papers 5/2018, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jan 2020.
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