Dynamic Monopoly Pricing Under the Reference Price Effect

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Dynamic Monopoly Pricing Under the Reference Price Effect

Journal Title: Проблеми економіки - Year 2015, Vol 2015, Issue 1

Abstract

One of the important aspects of the theory and practice of firms is development of an optimal dynamic pricing strategy. Traditional marketing models consider the consumer as a rational agent who makes decisions based on current prices. However, in the dynamics, with repeated purchases, consumers form price expectations or reference prices which are compared with current prices. This effect is known as "the reference price effect". The work focuses on the dynamic monopoly pricing in the presence of the reference price effect. To study this question, the author constructed a model of the monopoly selling the product over T periods. The study considers a case when the reference prices are formed on the basis of prices from the previous period. In this case, buyers’ purchase decisions also rely upon the ratio of the current and previous prices. In the long run, the monopoly can have various efficiency criteria. The article considers two efficiency criteria: the maximum profit within each period of time and the maximum profit for the whole time. The study allowed finding discrete and equilibrium solutions. A comparative analysis of profits of the monopoly by two criteria resulted in the following conclusions. In comparison with the situation of the absence of the reference effect, optimization by the global criterion increases profits and that by the local criterion reduces them. Obtained results show that in case of optimization by the global criterion the reference effect dwindles in the long run.

Authors and Affiliations

Serhij Melnikov

Keywords

monopoly dynamic pricing reference price effect

EP ID EP105900
DOI -
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