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Optimal best-price policy

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  • Xu, Frances Zhiyun

Abstract

A best-price policy (BP) is a promise by a seller to give her customer a refund if she reduces her price after the customer has already purchased the product. We characterize the optimal BP policy as when the seller can control both the policy length (when the promise expires) and the refund scale (what portion of the price difference is refunded). We explain why the policy length is finite and varies across industries. In a setting where consumers' valuations decline over time, we show that a finite-length BP allows the seller to commit to not lowering her price too soon, while at the same time letting her capture some of the benefits of intertemporal price discrimination. However, because the decline in consumers' valuations is uncertain, a BP does not allow the monopolist to achieve the profit she could earn with a full commitment.

Suggested Citation

  • Xu, Frances Zhiyun, 2011. "Optimal best-price policy," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 628-643, September.
    • Handle: RePEc:eee:indorg:v:29:y:2011:i:5:p:628-643
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    1. Tingliang Huang & Zhe Yin & Ying-Ju Chen, 2017. "Managing Posterior Price Matching: The Role of Customer Boundedly Rational Expectations," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 385-402, July.
    2. Sun, Yanhong & Sheng, Yiyun & Yan, Shuai & Zhang, Wei, 2023. "Pricing strategies in reward-based crowdfunding: Whether to introduce price guarantee?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 170(C).
    3. Khouja, Moutaz & Liu, Xin, 2021. "A price adjustment policy for maximizing revenue and countering strategic consumer behavior," International Journal of Production Economics, Elsevier, vol. 236(C).
    4. Zhan Pang & Wenqiang Xiao & Xuying Zhao, 2021. "Preorder Price Guarantee in e-Commerce," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 123-138, 1-2.
    5. Peng, Weicai & Tian, Zhongjun & Wang, Yefeng, 2020. "Price guarantee for advance selling in the presence of preorder-dependent social learning," International Journal of Production Economics, Elsevier, vol. 219(C), pages 115-122.
    6. Cohen-Vernik, Dinah & Pazgal, Amit, 2017. "Price Adjustment Policy with Partial Refunds," Journal of Retailing, Elsevier, vol. 93(4), pages 507-526.
    7. Khouja, Moutaz & Ajjan, Haya & Liu, Xin, 2019. "The effect of return and price adjustment policies on a retailer’s performance," European Journal of Operational Research, Elsevier, vol. 276(2), pages 466-482.

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