IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v253y2016i2p472-488.html
   My bibliography  Save this article

Stability and chaos in demand-based pricing under social interactions

Author

Listed:
  • Yuan, Xuchuan
  • Hwarng, H. Brian

Abstract

Demand-based pricing is often used to moderate demand fluctuations so as to level resource utilization and increase profitability. However, such pricing policies may not be effective when customers’ purchase decisions are influenced by social interactions. This paper investigates the demand dynamics, under a demand-based pricing policy, of a frequently purchased service when social interactions are at work. Customers are heterogeneous and adaptively forward-looking. Existing customers’ re-purchase decisions are based on adaptively formed price expectations and reservation prices. Potential customers are attracted through social interactions with existing customers. The demand process is characterized by a two-dimensional dynamical system. It is shown that the equilibrium demand can be unstable. For a given reservation price distribution, we first analyze the stability of the equilibrium demand under various scenarios of social interactions and customers’ adaptively forward-looking behavior, and then characterize their dynamics using the bifurcation plots, Lyapunov exponents and return maps. The results indicate that the demand process can be stable, periodic or chaotic. The study shows that the intended effect of a demand-based pricing policy may be offset by customers’ adaptively forward-looking behavior under the influence of social interactions. In fact, the interplay of these factors may even lead to chaotic demand dynamics. The result highlights the complex dynamics produced by a simple demand-price mechanism under social interactions. For a demand-based pricing strategy to be effective, companies must take social interactions into account.

Suggested Citation

  • Yuan, Xuchuan & Hwarng, H. Brian, 2016. "Stability and chaos in demand-based pricing under social interactions," European Journal of Operational Research, Elsevier, vol. 253(2), pages 472-488.
  • Handle: RePEc:eee:ejores:v:253:y:2016:i:2:p:472-488
    DOI: 10.1016/j.ejor.2016.02.047
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722171630100X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2016.02.047?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yuan, Xuchuan & Nishant, Rohit, 2021. "Understanding the complex relationship between R&D investment and firm growth: A chaos perspective," Journal of Business Research, Elsevier, vol. 129(C), pages 666-678.
    2. Lei, Yong & Liu, Qian & Shum, Stephen, 2017. "Warranty pricing with consumer learning," European Journal of Operational Research, Elsevier, vol. 263(2), pages 596-610.
    3. Yuan, Xuchuan & Brian Hwarng, H., 2023. "Examining the dynamics of reactive capacity allocation through a chaos lens," European Journal of Operational Research, Elsevier, vol. 308(2), pages 912-928.
    4. Junhai Ma & Zhanbing Guo, 2017. "Implications for Firms with Limited Information to Take Advantage of Reference Price Effect in Competitive Settings," Complexity, Hindawi, vol. 2017, pages 1-16, June.
    5. Maldonado, Felipe & Van Hentenryck, Pascal & Berbeglia, Gerardo & Berbeglia, Franco, 2018. "Popularity signals in trial-offer markets with social influence and position bias," European Journal of Operational Research, Elsevier, vol. 266(2), pages 775-793.
    6. Vujicic, Maja & Vujicic-Tomic, Brankica & Klaric, Mia, 2019. "Meeting Halfway — Comparison Between Cost-Based And Demand-Based Pricing Methods," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 10(2), pages 215-225.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:253:y:2016:i:2:p:472-488. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.