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Dynamic pricing with reference price dependence

Author

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  • Chenavaz, Régis

Abstract

A firm that accounts for consumer behavior sets the selling price of a product considering the reference price of consumers. In the literature, a reference price is usually modeled as depending on past selling prices. That is, past selling prices implicitly constrain the current selling price of a product. In this article, the author explicitly measures this constraint with an optimal control framework. He works on the structural properties of a general demand function, which depends on both selling and reference prices. Analytical results prove the following claims. Adjusting reference prices effects increase the price elasticity of demand, the demand function becoming flatter. Thus, the reference price effect weakens the market power of the firm. Also, the reference price effect constitutes a main driver of the dynamics of the selling price. But contrary to intuition, selling price dynamics does not systematically imitate reference price dynamics.

Suggested Citation

  • Chenavaz, Régis, 2016. "Dynamic pricing with reference price dependence," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-17.
  • Handle: RePEc:zbw:ifweej:201622
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2016-22
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    File URL: https://www.econstor.eu/bitstream/10419/146403/1/868017620.pdf
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    References listed on IDEAS

    as
    1. Chenavaz, Régis, 2012. "Dynamic pricing, product and process innovation," European Journal of Operational Research, Elsevier, vol. 222(3), pages 553-557.
    2. Chenavaz Régis, 2017. "Better Product Quality May Lead to Lower Product Price," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(1), pages 1-22, January.
    3. Zhang, Jie & Kevin Chiang, Wei–yu & Liang, Liang, 2014. "Strategic pricing with reference effects in a competitive supply chain," Omega, Elsevier, vol. 44(C), pages 126-135.
    4. Sam Aflaki & Ioana Popescu, 2013. "Managing Retention in Service Relationships," Post-Print hal-00960794, HAL.
    5. Zhang, Juan & Gou, Qinglong & Liang, Liang & Huang, Zhimin, 2013. "Supply chain coordination through cooperative advertising with reference price effect," Omega, Elsevier, vol. 41(2), pages 345-353.
    6. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
    7. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages 161-169.
    8. Régis Chenavaz, 2011. "Dynamic pricing rule and R&D," Economics Bulletin, AccessEcon, vol. 31(3), pages 2229-2236.
    9. Praveen K. Kopalle & Ambar G. Rao & João L. Assunção, 1996. "Asymmetric Reference Price Effects and Dynamic Pricing Policies," Marketing Science, INFORMS, vol. 15(1), pages 60-85.
    10. Winer, Russell S, 1986. " A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, Oxford University Press, vol. 13(2), pages 250-256, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    dynamic pricing; behavioral pricing; reference price dependence; optimal control;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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