Shaping consumer demand through the use of contingent pricing

Abstract

In this chapter I assert that revenue management techniques like contingent pricing are not merely an optimal response by firms to exogenous conditions of uncertain demand that is spread over time but that sometimes one of the aims of those techniques is to shape consumer demand in such a way as to create the conditions necessary for successful employment of intertemporal price discrimination. In this view, the interaction between a firm’s policies and the strategic response of consumers to those policies leads to consumer arrival processes that are the basis of many revenue management techniques. I consider a model with strategic consumers who can decide when to show up in the market and reveal demand. Using the example of contingent pricing, I investigate how consumers’ awareness of the use of contingent pricing affects their decisions regarding when to show up in the market and how, in turn, consumers’ responses should affect the firm’s use of contingent pricing. I identify the conditions under which it is optimal for the firm to use contingent pricing to induce consumers to arrive at different times in the market. Implications for the design and use of contingent pricing and for public policy are explored.