Showing papers on "Limit price published in 2013"

Dynamic Cloud Pricing for Revenue Maximization

Abstract: In cloud computing, a provider leases its computing resources in the form of virtual machines to users, and a price is charged for the period they are used. Though static pricing is the dominant pricing strategy in today's market, intuitively price ought to be dynamically updated to improve revenue. The fundamental challenge is to design an optimal dynamic pricing policy, with the presence of stochastic demand and perishable resources, so that the expected long-term revenue is maximized. In this paper, we make three contributions in addressing this question. First, we conduct an empirical study of the spot price history of Amazon, and find that surprisingly, the spot price is unlikely to be set according to market demand. This has important implications on understanding the current market, and motivates us to develop and analyze market-driven dynamic pricing mechanisms. Second, we adopt a revenue management framework from economics, and formulate the revenue maximization problem with dynamic pricing as a stochastic dynamic program. We characterize its optimality conditions, and prove important structural results. Finally, we extend to consider a nonhomogeneous demand model.

The Limits of Price Discrimination

Abstract: We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the efficient gains from trade. As well as characterizing the welfare impact of price discrimination, we examine the limits of how prices and quantities can change under price discrimination. We also examine the limits of price discrimination in richer environments with quantity discrimination and limited ability to segment the market.

Low Prices are Just the Beginning: Price Image in Retail Management:

Abstract: Recent managerial evidence and academic research has suggested that consumer decisions are influenced not only by the prices of individual items but also by a retailer's price image, which reflects a consumer's impression of the overall price level of a retailer. Despite the increasing importance of price image in marketing theory and practice, existing research has not provided a clear picture of how price images are formed and how they influence consumer behavior. This article addresses this discrepancy by offering a comprehensive framework delineating the key drivers of price image formation and their consequences for consumer behavior. Contrary to conventional wisdom that assumes price image is mainly a function of a retailer's average price level, this research identifies several price-related and nonprice factors that contribute to price image formation. The authors further identify conditions in which these factors can overcome the impact of the average level of prices, resulting in a low price ima...

Price Competition with Consumer Confusion

Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.

An appraisal of behavioral price research (part 1): price as a physical stimulus

Abstract: How do buyers judge prices? How do they know whether a product or service is priced reasonably, is a good deal or is too expensive? Do buyers perceive all price increases and all price promotions? Do price promotions and price increases necessarily change buyer behavior? How do buyers process the plethora of price information they encounter each day? Economists contend that price primarily represents the monetary sacrifice to obtain a product or service. Behavioral price researchers argue that more complex phenomena are involved. Buyers have individual, internal norms against which they judge prices. There are threshold points below which buyers do not perceive price changes. There are also specific ranges of prices buyers find acceptable for a particular product. Despite over four decades of behavioral price research, we know little about the root causes of these buyer responses to price information. This article is the first of several planned essays that will review the historical, theoretical and empirical developments in the field of behavioral price research. In this first review, we examine the core concepts behind buyer responses to price as well as the complex way that people process numbers. The objective of these essays is to bring focus to, clarify conceptual definitions, examine empirical developments and raise future research questions for this field of study.

Reconsidering price limit effectiveness

Abstract: We study China's experience with price limits by comparing a period with price limits to a period without price limits. Although many prior studies document costs of price limits, we show benefits of price limits. We find that price limits can facilitate price discovery, moderate transitory volatility, and mitigate abnormal trading activity. A tighter price limit for poorly performing stocks can also moderate volatility. We do not find evidence of a magnet effect, which suggests that prices gravitate to limit prices. Finally, we find evidence that price limits can facilitate market recovery following crashes.

What Drives the Market Share Changes? Price versus Non-Price Factors

Abstract: The paper proposes a theoretical framework to explain gains and losses in export market shares by their price and non-price determinants. Starting from a demand-side model a la Armington (1969), we relax several restrictive assumptions to evaluate the contribution of unobservable changes in taste and quality, taking into account differences in elasticities of substitution across product markets. Using highly disaggregated trade data from UN Comtrade, our empirical analysis for the major world exporters (G7 and BRIC countries) reveals the dominant role of non-price factors in explaining the competitive gains of BRIC countries and concurrent decline in the G7’s share of world exports.

Drug Innovations and Welfare Measures Computed from Market Demand: The Case of Anti-Cholesterol Drugs

Abstract: The pharmaceutical industry is characterized as having substantial investment in R&D and a large number of new product introductions, which poses special problems for price measurement caused by the quality of drug products changing over time. This paper applies recent demand estimation techniques to individual level data to construct a constant-quality price index for anti-cholesterol drugs. Although the average price for anti-cholesterol drugs does not change over the sample period, I …nd that the constant-quality price index drops by 27 percent, a pace more in line with our expectations in such a dynamic segment of the industry.

Optimal pricing and lot-sizing for perishable inventory with price and time dependent ramp-type demand

Abstract: Product perishability is an important aspect of inventory control. To minimise the effect of deterioration, retailers in supermarkets, departmental store managers, etc. always want higher inventory depletion rate. In this article, we propose a dynamic pre-and post-deterioration cumulative discount policy to enhance inventory depletion rate resulting low volume of deterioration cost, holding cost and hence higher profit. It is assumed that demand is a price and time dependent ramp-type function and the product starts to deteriorate after certain amount of time. Unlike the conventional inventory models with pricing strategies, which are restricted to a fixed number of price changes and to a fixed cycle length, we allow the number of price changes before as well as after the start of deterioration and the replenishment cycle length to be the decision variables. Before start of deterioration, discounts on unit selling price are provided cumulatively in successive pricing cycles. After the start of deterioration, discounts on reduced unit selling price are also provided in a cumulative way. A mathematical model is developed and the existence of the optimal solution is verified. A numerical example is presented, which indicates that under the cumulative effect of price discounting, dynamic pricing policy outperforms static pricing strategy. Sensitivity analysis of the model is carried out.

Transparency in pricing and its effect on perceived price fairness

Abstract: Purpose – This research aims to examine the effects of transparency in pricing (i.e. disclosure of a price increase and extent of explanation) on perceived price fairness when a firm increases price. Design/methodology/approach – US adult consumer panelists participated in two online experiments. Findings – Consumers perceive a firm's price increase as more fair when the firm discloses the increase itself as compared to an outside source disclosing it. For a small price increase, a limited explanation was perceived as more fair; for a larger price increase, a more detailed aligned cost explanation was perceived as more fair. Research limitations/implications – Firms who must raise prices may increase consumer perceptions of price fairness by disclosing the price increase and providing an appropriate explanation matched to the size of the increase. Originality/value – This research focuses on the effects of being more transparent about pricing in the case of a price increase. Perceived price fairness is af...

Strategic price positioning for revenue management: The effects of relative price position and fluctuation on performance

Abstract: Emerging price optimization models systematically incorporate competitor price information into the derivation of optimal price points. While consideration of competitor pricing at this tactical level is essential to maximizing short-term revenues, the long-term impact of competitive price positioning on revenue performance should not be overlooked. This study examines the effect of two key dimensions of strategic price positioning – relative price position and relative price fluctuation – on the revenue performance of 6998 US hotels over an 11-year period. It finds that revenue performance is strongest for hotels that price higher than the competition and maintain a consistent relative price over time. Implications for revenue management practitioners are discussed.

Dynamic pricing of substitutable products in the presence of capacity flexibility

Abstract: Firms that offer multiple products are often susceptible to periods of inventory mismatches where one product may face shortages while the other has excess inventories. In this paper, we study a joint implementation of price- and capacity-based substitution mechanisms to alleviate the level of such inventory disparities. We consider a firm producing substitutable products via a capacity portfolio consisting of both product-dedicated and flexible resources and characterize the structure of the optimal production and pricing decisions. We then explore how changes in various problem parameters affect the optimal policy structure. We show that the availability of a flexible resource helps maintain stable price differences across products over time even though the price of each product may fluctuate over time. This result has favorable ramifications from a marketing standpoint because it suggests that even when a firm applies a dynamic pricing strategy, it may still establish consistent price positioning among...

The Effects of Retail Regulations on Prices: Evidence from the Loi Galland

Abstract: Using a unique data set merging micro-store level data with grocery markets data, this article provides an empirical analysis of a legislation that had the same effect as allowing industry-wide price floors. It shows that, after the introduction of the legislation, the link between retail prices and market concentration has significantly been weakened. Price dispersion has dropped for branded products more than for store brands and price convergence appears to have taken place across stores. These results are consistent with recent theories on the anti-competitive effects of resale price maintenance in markets with interlocking relationships.

Residential Water Use: Efficiency, Affordability, and Price Elasticity

Abstract: In practice, water pricing is the main economic instrument used to discourage the wasteful use of residential water. Owing to considerations of affordability, residential water is systematically underpriced because water is essential for life. Such a low price results in water being used inefficiently. This paper proposes a system that supplements the existing price system with a cap-and-trade measure to reconcile conflicts among the goals of residential water use. It forces all people (independent of income) to be faced with reasonable price signals and to use water efficiently. The poor could, however, gain from trade and afford water. By taking advantage of the agent-based model, a simulation of this system applied to Taipei, Taiwan shows that those with lower income per capita are better off under this system even though the equilibrium price of residential water is higher. The simulated average price elasticity of market demand is −0.449.

Threat of entry, asymmetric information, and pricing

Abstract: This paper examines the impact of asymmetric information on incumbent firms' propensity to engage in limit pricing when faced with threat of entry. I draw from information economics to argue that incumbents will use price to respond ex ante to entry in situations characterized by asymmetric information. I suggest two situations in which asymmetric information can arise: when potential entrants are from outside the primary industry and when incumbent firms are members of R&D consortia. I then study pricing in the U.S. cable TV industry to show that pricing patterns of incumbent cable TV systems are consistent with limit pricing when the relationship between the incumbent and potential entrant is characterized by asymmetric information. Copyright © 2012 John Wiley & Sons, Ltd.

Appliance Efficiency Standards and Price Discrimination

Abstract: I explore the effects of two simultaneous changes in minimum energy efficiency and ENERGY STAR standards for clothes washers. Adapting the Mussa and Rosen (1978) and Ronnen (1991) second-degree price discrimination model, I demonstrate that clothes washer prices and menus adjusted to the new standards in patterns consistent with a market in which firms had been price discriminating. In particular, I show evidence of discontinuous price drops at the time the standards were imposed, driven largely by mid-low efficiency segments of the market. The price discrimination model predicts this result. On the other hand, in a perfectly competition market, prices should increase for these market segments. Additionally, new models proliferated in the highest efficiency market segment following the standard changes. Finally, I show that firms appeared to use different adaptation strategies at the two instances of the standards changing.

The dangers of marginal cost based electricity pricing

Abstract: Led by energy and environmental policies the EU power sector is undergoing vast changes to achieve a market driven and sustainable future. Market based price discovery and different renewable support schemes are seen as key solutions in achieving the desired future production mix. Most liquid power markets use marginal cost based price discovery where the price is set by marginal costs of the last producer needed to cover all load, usually a fossil fuel power plant. At the same time the majority of new investments are made with significant help from government support schemes in renewable production capacities, which have very low marginal costs. The increasing share of renewable production will thus impact price levels in day-ahead markets. This paper analyses the potential impact of more renewable electricity production on price discovery in the NordPool Spot market, which already has a high share of renewable electricity traded. Results show that ceteris paribus NordPool Spot is likely to have ...

How Do Consumers Respond to Gasoline Price Cycles

Abstract: This paper empirically studies how consumers respond to retail gasoline price cycles. Our analysis uses new station-level price data from local markets in Ontario, Canada, and a unique market-level measure of consumer responsiveness based on web traffic from gasoline price reporting websites. We first document how stations use coordinated pricing strategies that give rise to large daily changes in price levels and dispersion in cycling gasoline markets. We then show consumer responsiveness exhibits cycles that move with these price fluctuations. Through a series of tests we find that forward-looking stockpiling behavior by consumers plays a central role in generating these patterns.

Multi-period price promotions in a single-supplier, multi-retailer supply chain under asymmetric demand information

Abstract: This paper considers a two-stage supply chain in which a supplier serves a set of stores in a retail chain. We consider a two-stage Stackelberg game in which the supplier must set price discounts for each period of a finite planning horizon under uncertainty in retail-store demand. As a mechanism to stimulate sales, the supplier offers periodic off-invoice price discounts to the retail chain. Based on the price discounts offered by the supplier, and after store demand uncertainty is resolved, the retail chain determines individual store order quantities in each period. Because the supplier offers store-specific prices, the retailer may ship inventory between stores, a practice known as diverting. We demonstrate that, despite the resulting bullwhip effect and associated costs, a carefully designed price promotion scheme can improve the supplier’s profit when compared to the case of everyday low pricing (EDLP). We model this problem as a stochastic bilevel optimization problem with a bilinear objective at each level and with linear constraints. We provide an exact solution method based on a Reformulation-Linearization Technique (RLT). In addition, we compare our solution approach with a widely used heuristic and another exact solution method developed by Al-Khayyal (Eur. J. Oper. Res. 60(3):306–314, 1992) in order to benchmark its quality.

Retailers' Use of Partially Comparative Pricing: From Across- Category to Within-Category Effects

Abstract: Prior research suggests that partially comparative pricing—in which a retailer provides price comparisons for some, but not all, of its products—is a double-edged sword. On the one hand, such pricing improves beliefs about the retailer's competitive price advantage on comparatively priced products for which its prices are compared with a competitor. On the other hand, it has been shown to damage perceptions of the retailer's noncomparatively priced products relative to those charged by the competition. However, this latter outcome is based on evidence examining the influence of partially comparative pricing across different product categories. The authors propose and demonstrate in five studies that price comparisons may actually improve relative price beliefs about the noncomparatively priced brands within the same product category. They further show this improvement to be attenuated as the number of price comparisons increase or when the price comparison is attached to a brand perceived as less typical ...

Committed versus Contingent Pricing under Competition

Abstract: Should capacitated firms set prices responsively to uncertain market conditions in a competitive environment? We study a duopoly selling differentiated substitutable products with fixed capacities under demand uncertainty, where firms can either commit to a fixed price ex ante, or elect to price contingently ex post, e.g., to charge high prices in booming markets, and low prices in slack markets. Interestingly, we analytically show that even for completely symmetric model primitives, asymmetric equilibria of strategic pricing decisions may arise, in which one firm commits statically and the other firm prices contingently; in this case, there also exists a unique mixed strategy equilibrium. Such equilibrium behavior tends to emerge, when capacity is ampler, and products are less differentiated or demand uncertainty is lower. With asymmetric fixed capacities, if demand uncertainty is low, a unique asymmetric equilibrium emerges, in which the firm with more capacity chooses committed pricing and the firm with less capacity chooses contingent pricing. We identify two countervailing profit effects of contingent pricing under competition: gains from responsively charging high price under high demand, and losses from intensified price competition under low demand. It is the latter detrimental effect that may prevent both firms from choosing a contingent pricing strategy in equilibrium. We caution that responsive price changes under aggressive competition of less differentiated products can result in profit-killing discounting. We show that our results remain valid when capacity decisions are endogenized.