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Optimal Pricing of Nondurables when Demand is Dynamic and Stochastic

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  • Franz Wirl

Abstract

This paper derives optimal pricing strategies for nondurables if demand is sluggish and stochastic. The puzzling result is that moving from a static demand to a dynamic relation alters the marketing strategy dramatically if the equilibrium demand is convex (in price): the profit maximizing price policy is to switch between a low and a high price depending on current demand while a continuous price policy is optimal for concave demand relations. However, the formal existence of such a price switching policy is restricted to the anyway more realistic stochastic version of the model. The clear cut implications of the model provide also a criterion to test empirically the characteristics and the optimality of actual price strategies.

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File URL: http://www.tandfonline.com/10.1080/13571516.2010.483096
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 17 (2010)
Issue (Month): 2 ()
Pages: 187-206

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Handle: RePEc:taf:ijecbs:v:17:y:2010:i:2:p:187-206

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Related research

Keywords: Price Switching; Ito Process; Sluggish; Stochastic and Convex Demand; Nondurables;

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