A Dynamic Theory of Random Price Discounts

Francesc Dilmé and Daniel F. Garrett ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: A seller with commitment power sets prices over time. Risk‐averse buyers arrive to the market and decide when to purchase. We show that it is optimal for the seller to choose a constant high price punctuated by occasional episodes of sequential discounts that occur at random times. This optimal price path has the property that the price a buyer ends up paying is independent of his arrival and purchase times, and only depends on his valuation. Our theory accommodates empirical findings on the timing of discounts.

Keywords: dynamic pricing; sales; random mechanisms (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Pages: 45
Date: 2025-05
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