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Dynamic pricing with fairness concerns and a capacity constraint

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  • Matthew Selove

    (Chapman University)

Abstract

Although some firms use dynamic pricing to respond to demand fluctuations, other firms claim that fairness concerns prevent them from raising prices during periods when demand exceeds capacity. This paper explores conditions in which fairness concerns can or cannot cause shortages. In our model, a firm announces a price policy that states its prices during high and low demand, and customers must travel to a venue to learn the current price. We show that the interaction of fairness concerns with travel costs can cause the firm to set stable prices, which leads to shortages during high demand. However, if the firm is able to inform customers about the current price before they incur any travel costs, then dynamic pricing with no shortages is optimal even with strong fairness concerns.

Suggested Citation

  • Matthew Selove, 2019. "Dynamic pricing with fairness concerns and a capacity constraint," Quantitative Marketing and Economics (QME), Springer, vol. 17(4), pages 385-413, December.
    • Handle: RePEc:kap:qmktec:v:17:y:2019:i:4:d:10.1007_s11129-019-09212-8
    DOI: 10.1007/s11129-019-09212-8
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    Cited by:

    1. Wen Diao & Mushegh Harutyunyan & Baojun Jiang, 2023. "Consumer Fairness Concerns and Dynamic Pricing in a Channel," Marketing Science, INFORMS, vol. 42(3), pages 569-588, May.
    2. Cristina Nistor & Matthew Selove, 2020. "Pricing and Quality Provision in a Supply Relationship: A Model of Efficient Relational Contracts," Marketing Science, INFORMS, vol. 39(5), pages 939-955, September.

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    More about this item

    Keywords

    Game theory; Dynamic pricing; Fairness; Rationing;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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