Optimal pricing when rational consumers anticipate monitoring cost

Xuan Tang and Xiaona Zheng

Applied Economics, 2018, vol. 50, issue 48, 5155-5163

Abstract: This article considers a monopolistic firm’s optimal pricing decision over two periods among dynamic pricing, preannounced pricing and single pricing. In the models, consumers rationally determine whether to exhibit strategic waiting by weighing their costs against prospectively lower price. Our analysis yields three main results. First, single pricing that completely eliminates strategic waiting surely would be dominated by intertemporal pricing when facing rational consumers. Second, preannounced pricing may actually yield lower revenue than dynamic pricing when considering its effect on the reduction of consumer monitoring cost. Only when monitoring costs under dynamic pricing and under preannounced pricing are equal, is firm revenue weakly greater under preannounced pricing than under dynamic pricing. Third, in dynamic pricing equilibrium, increasing monitoring cost may increase firm revenue, consumer surplus and social welfare simultaneously.

Date: 2018
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DOI: 10.1080/00036846.2018.1486010

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