A capacitated firm’s pricing strategies for strategic consumers with different search costs

Mingzheng Wang (), Mengru Ma, Xiaohang Yue () and Samar Mukhopadhyay ()
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Mingzheng Wang: Dalian University of Technology
Mengru Ma: Dalian University of Technology
Xiaohang Yue: University of Wisconsin-Milwaukee
Samar Mukhopadhyay: Sungkyunkwan University-GSB

Annals of Operations Research, 2016, vol. 240, issue 2, No 15, 760 pages

Abstract: Abstract This paper studies pricing strategies of a seller with budget constraints facing two types of strategic consumers with different search costs, and proposes three pricing strategies to motivate all consumers to visit his shop. These are the basic price strategy, differentiated compensation strategy and an improved differentiated compensation strategy. Based on the rational expectations paradigm, we characterize the rational expectations equilibrium in the game and propose a basic pricing strategy. In order to address the interplay between price and demand, we further propose a differentiated compensation strategy to improve the basic model. We then compare the differentiated compensation strategy to the basic pricing strategy when both are feasible. We find that selection of the optimal strategy is independent of composition of consumers but is dependent on the seller’s budget level and the difference between the two search costs. If the budget is large enough and the difference between the search costs is small enough, a differentiated compensation strategy can further improve the seller’s profitability. In addition to these findings, we first propose an improved differentiated compensation strategy to further enhance the firm’s profit. We find that the optimal strategy is to implement the improved differentiated compensation strategy when all three strategies are feasible. Interestingly, the firm may benefit from paying a high compensation to the consumers.

Keywords: Pricing strategy; Strategic consumers; Product availability; Search costs; Differentiated compensation (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10479-013-1512-3

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