NDLI: Dynamic Pricing with Fairness Concerns and a Capacity Constraint

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Dynamic Pricing with Fairness Concerns and a Capacity Constraint

Content Provider	Scilit
Author	Selove, Matthew
Copyright Year	2018
Description	Journal: SSRN Electronic Journal Many managers cite fairness concerns as a reason not to vary prices over time, even during periods when their demand exceeds their capacity. However, even if customers have strong fairness concerns, it is not obvious why firms would set prices low enough to generate shortages, rather than raising prices and selling all of their capacity to customers with higher product valuations. To explain this puzzle, we derive conditions in which the interaction of fairness concerns with customer uncertainty about demand leads to shortages in equilibrium. We develop a model in which a firm sets a price policy that indicates its prices during high and low demand, and customers must incur a search cost to learn the firm's demand level in each period. If customers derive sufficient disutility from paying a higher price than others, we show that optimal peak-demand prices are low enough to generate shortages. On the other hand, if the firm can costlessly reveal each period's demand state before customers make search decisions, then doing so increases equilibrium profits, and dynamic pricing with no shortages is optimal even with strong fairness concerns.
Related Links	https://digitalcommons.chapman.edu/cgi/viewcontent.cgi?article=1094&context=business_articles https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=3255082
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.3255082
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2018-09-25
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Dynamic Pricing Game Theory
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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