Optimal Dynamic Pricing of Perishable Items by a Monopolist Facing Strategic Consumers
Version of Record online: 30 MAR 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 19, Issue 1, pages 40–60, January/February 2010
How to Cite
Levin, Y., McGill, J. and Nediak, M. (2010), Optimal Dynamic Pricing of Perishable Items by a Monopolist Facing Strategic Consumers. Production and Operations Management, 19: 40–60. doi: 10.1111/j.1937-5956.2009.01046.x
- Issue online: 8 JAN 2010
- Version of Record online: 30 MAR 2009
- History: Received: February 2008; Accepted: December 2008 by Costis Maglaras; after 3 revisions.
- customer behavior;
- dynamic pricing;
- strategic consumers;
- stochastic games
We introduce a dynamic pricing model for a monopolistic company selling a perishable product to a finite population of strategic consumers (customers who are aware that pricing is dynamic and may time their purchases strategically). This problem is modeled as a stochastic dynamic game in which the company's objective is to maximize total expected revenues, and each customer maximizes the expected present value of utility. We prove the existence of a unique subgame-perfect equilibrium pricing policy, provide equilibrium optimality conditions for both customer and seller, and prove monotonicity results for special cases. We demonstrate through numerical examples that a company that ignores strategic consumer behavior may receive much lower total revenues than one that uses the strategic equilibrium pricing policy. We also show that, when the initial capacity is a decision variable, it can be used together with the appropriate pricing policy to effectively reduce the impact of strategic consumer behavior. The proposed model is computationally tractable for problems of realistic size.