Counteracting strategic consumer behavior in dynamic pricing systems

Abstract

Dynamic pricing and revenue management practices are gaining increasing popularity in the retail industry, and have engendered a large body of academic research in recent decades. When applying dynamic pricing systems, retailers must account for the fact that, often, strategic customers may time their purchases in anticipation of future discounts. Such strategic consumer behavior might lead to severe consequences on the retailers’ revenues and profitability. Researchers have explored several approaches for mitigating the adverse impact of this phenomenon, such as rationing capacity, making price and capacity commitments, using internal price-matching policies, and limiting inventory information. In this chapter, we present and discuss some relevant theoretical contributions in the management science literature that help us understand the potential value of the above mitigating strategies.