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Dynamic pricing with reference price effect and price-matching policy in the presence of strategic consumers

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  • Nenggui Zhao
  • Qiang Wang
  • Ping Cao
  • Jie Wu

Abstract

In this paper, we consider a retailer that sells a product with high storage cost over a two-period horizon. The goal is to investigate the single and combined effects of reference price and price-matching (PM) on the purchasing behavior of consumers and determine how these affect the retailer’s optimal pricing decisions and optimal total discounted revenue. We first present a discrete-time dynamic pricing (DP) model over a two-period horizon with a reference price effect in the presence of strategic consumers. Then we subsequently extended to another DP model in which the retailer implements a PM policy. The results show that under the reference price effect, the retailer’s revenue will always decrease, even when a PM policy is implemented. The PM policy is not always beneficial for the retailer, especially when the discount factor is infinitely close to 1. Second, we propose a model misspecification approach to investigate the effect of the reference price. Furthermore, the value of a PM policy is discussed. We find that the value of a PM policy is generally best when the discount factor is at a threshold value and also that the value of PM is much greater in the presence of strategic purchasing behavior.

Suggested Citation

  • Nenggui Zhao & Qiang Wang & Ping Cao & Jie Wu, 2019. "Dynamic pricing with reference price effect and price-matching policy in the presence of strategic consumers," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 70(12), pages 2069-2083, December.
    • Handle: RePEc:taf:tjorxx:v:70:y:2019:i:12:p:2069-2083
    DOI: 10.1080/01605682.2018.1510809
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    Cited by:

    1. Wang, Qiang & Zhao, Nenggui & Wu, Jie & Zhu, Qingyuan, 2021. "Optimal pricing and inventory policies with reference price effect and loss-Averse customers," Omega, Elsevier, vol. 99(C).
    2. Sun, Libo & Jiao, Xiaoting & Guo, Xiaolong & Yu, Yugang, 2022. "Pricing policies in dual distribution channels: The reference effect of official prices," European Journal of Operational Research, Elsevier, vol. 296(1), pages 146-157.
    3. Alderighi, Marco & Nava, Consuelo R. & Calabrese, Matteo & Christille, Jean-Marc & Salvemini, Chiara B., 2022. "Consumer perception of price fairness and dynamic pricing: Evidence from Booking.com," Journal of Business Research, Elsevier, vol. 145(C), pages 769-783.
    4. Hao Li & Qing Xiao & Ting Peng, 2023. "Optimal Pricing Strategy of New Products and Remanufactured Products Considering Consumers’ Switching Purchase Behavior," Sustainability, MDPI, vol. 15(6), pages 1-26, March.

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