Optimal Pricing of Nondurables when Demand is Dynamic and Stochastic

Franz Wirl

International Journal of the Economics of Business, 2010, vol. 17, issue 2, 187-206

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.

Keywords: Price Switching; Ito Process; Sluggish; Stochastic and Convex Demand; Nondurables (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/13571516.2010.483096

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