Shattering the Myth of Costless Price Changes: Emerging Perspectives on Dynamic Pricing

2014

Dramatic price changes, such as large discounts, are often used by firms seeking to boost sales. An equivalent major price increase may severely inhibit sales, in fact even more so, hence some firms prefer to raise prices gradually. In some scenarios firms seek to change prices in small increments over time while in others they may make a single large change. Basing itself on largely on prospect theory, this article examines the asymmetric and unequal response of consumers to increases and decreases in price changes over time, and examines how product purchase frequency, price uncertainty, consumer adaptation, and the directionality of the change impact the effectiveness of alternative strategies. The article develops and tests hypotheses that conclude (a) dramatic price increase effects are less consequential (in terms of demand), for more frequently purchased products (b) the impacts of increases are greater than the impacts of decreases (c) less dramatic (smaller, gradual and inc...

Marketing Science, 2015

Current complex dynamic markets are characterized by numerous brands, each with multiple products and price points, and differentiated on a variety of product attributes plus a large number of new product introductions. This study seeks to analyze dynamic pricing paths in a highly complex branded market, consisting of 663 products under 79 brand names of digital cameras. The authors develop a method to classify dynamic pricing strategies and analyze the choice and correlates of observed pricing paths in the introduction and early growth phase of this market. The authors find that, despite numerous recommendations in the literature for skimming or penetration pricing, market pricing dominates in practice. In particular, the authors find five patterns: skimming (20% frequency), penetration (20% frequency), and three variants of market-pricing patterns (60% frequency), where new products are launched at market prices. Skimming pricing launches the new product 16% above the market price...

Journal of emerging technologies and innovative research, 2020

With the rise of online retail, the sales game has gone up a few notches. Strategies that once proved to be failsafe ways to secure business have become archaic, leaving companies struggling to develop new tactics to beat their competitors and rein in and retain customers. Even though a lot has changed in how sales-driven businesses approach the future, the pricing factor remains the same in persuading consumers to consider one company over another for the same product or service. The phenomenon of Dynamic pricing has been introduced in the last few years where large quantum’s of data are analysed and ideal prices for items are calculated. The time between the changes in prices depends on the business and item, but can be changed as often as every day, or even every hour. Because of this strategy, our company under study, Amazon, is able to adjust to the lower cost of eCommerce and maximize profit on all fronts. With this technique Amazon is able to set flexible prices for products ...

The finding of small price changes in many retail price datasets is often viewed as a puzzle. We show that a possible explanation for the presence of small price changes is related to sales volume, an observation that has been overlooked in the existing literature. Analyzing a large retail scanner price dataset that contains information on both prices and sales volume, we find that small price changes are more frequent when products’ sales volume is high. This finding holds across product categories, within product categories, and for individual products. It is also robust to various sensitivity analyses such as measurement errors, the definition of “small” price changes, the inclusion of measures of price synchronization, the size of producers, the time horizon used to compute the average sales volume, the revenues, the competition, shoppers’ characteristics, etc.

Handbook of Pricing Research in Marketing, 2009

This chapter organizes and reviews the literature on new product pricing, with a primary focus on normative models that take a dynamic perspective. Such a perspective is essential in the new product context, given the underlying demand-and supply-side dynamics and the need to take a long-term, strategic, view in setting pricing policy. Along with these dynamics, the high levels of uncertainty (for fi rms and customers alike) make the strategic new product pricing decision particularly complex and challenging. Our review of normative models yields key implications that provide (i) theoretical insights into the drivers of dynamic pricing policy for new products and services, and (ii) directional guidance for new product pricing decisions in practice. However, as abstractions of reality, these normative models are limited as practical tools for new product pricing. On the other hand, the new product pricing tools available are primarily helpful for setting specifi c (myopic) prices rather than a dynamic long-term pricing policy. Our review and discussion suggest several areas that offer opportunities for future research. * Comments and suggestions from Vithala R. Rao, Jehoshua Eliashberg and an anonymous reviewer are gratefully acknowledged. 1 Noble and Gruca's study is not limited to new products. They organize the strategies by the pricing situation for both new and mature products and then, for strategies within each pricing situation, by the conditions expected to favor the choice of a particular strategy. The three new product strategies were chosen by 32 percent of all respondents across all situations (skimming 14 percent, penetration 9 percent, and experience curve pricing 11 percent).

SSRN Electronic Journal, 2006

for their continuous encouragement and intellectual support on this line of research. The authors would especially like to thank Shantanu Dutta and Mark Ritson for all their efforts on this line of research. All errors are ours.

International Business Research, 2022

Due to its success and acceptance in the airline and hospitality industry and the growing availability of behavioral, engagement, and attitudinal consumer data, dynamic pricing strategies are gaining popularity. The purpose of this systematic literature review is to answer the research question about how do dynamic pricing strategies affect customer perceptions and behaviors to avoid negative consumer reactions. The synthesis of over 50 articles revealed eight different research streams like for example the factors moderating the impact of dynamic pricing on customer behavior, strategic purchasing behavior in response to dynamic pricing, effect of dynamic pricing on customer perception of fairness, personalized dynamic pricing (PDP) and channel differentiated pricing. To advance future research, this systematic literature review identified the six propositions for further research like for example the assessment of the efficacy of different types of communication by firms seeking to mitigate the negative impacts of dynamic pricing and the assessment of the role and relevant importance of consumers' personal characteristics upon their perceptions of price changes. The findings of this study have a practical impact for managers and scholars. Scholars may use them to update their research agendas and managers to optimize their pricing strategies to increase revenues.

International Series in Operations Research & Management Science, 2009

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 pricematching 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.

Management Science, 2007

F irms in many industries experience protracted periods of pricing power, the ability to successfully enact price increases. In these situations, firms must decide not only whether to raise prices, but to whom. Specifically, in a competitive context, they must determine whether it is more profitable to increase prices across-the-board or to a specific segment of their customer base. While selective price decreases are ubiquitous in practice (e.g., better deals to potential new customers by phone carriers; better deals to current customers by various magazines), to our knowledge selective price increases are relatively rare. We illustrate the benefits of targeted price increases, and, as such, we expand the repertoire of firms' promotional policies. To that end, we explore a scenario where two competing firms must decide whether to increase prices to the entire market or only to a specific segment. Targeted price increases (TPI), i.e., being offered an unchanged price (selectively) when others are subject to price increases, can be offered to Loyals (those who bought from the firm in the previous period) or Switchers (those who did not). The effects of TPIs are estimated through a laboratory experiment and an associated stochastic model, each allowing for both rational (Loyalty, Switching) and behaviorist (Betrayal, Jealousy) effects. We find that TPIs can indeed yield beneficial results (greater retention for Loyals or greater attraction of Switchers) and greater profits in certain circumstances. Results for TPI are additionally benchmarked against those for targeted price decreases and are found to differ. The range of effects stemming from the experiment can be used in a competitive analysis to yield equilibrium strategies for the two firms. In this case, we find that-depending on the magnitude of the price increase, market shares of the two firms, and price knowledge across consumer segments-a firm may wish to embrace targeted price increases in some situations, to institute across-the-board price increases in others, and to not enact any price increases in still others. We show that a firm can sacrifice considerable profit if it settles on a suboptimal pricing strategy (e.g., wrongly instituting an across-the-board increase), favors the wrong segment (e.g., Switchers instead of Loyals), or ignores "behaviorist" effects (Betrayal or Jealousy).