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Dynamic pricing in the presence of reference price effect and consumer strategic behaviour

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  • Kehong Chen
  • Yong Zha
  • Layth C. Alwan
  • Lu Zhang

Abstract

This paper presents a model for designing two-stage dynamic pricing strategies when the seller faces strategic consumers in the presence of a reference price effect. The consumers form the utilities of two sequential periods based on anticipated future retail price in the second period and current retail price in the first period as the reference price, and then choose the purchasing timing, representing strategic behaviour. We first consider a centralised system where the seller chooses between two pricing policies: markdown pricing and markup pricing under a centralised system, and find that the seller will not adopt a markup pricing policy. We derive equilibrium prices and optimal pricing strategies for the seller under markdown pricing policy using equilibrium theory and backward induction method. We find that the seller’s profit decreases with the consumer strategic behaviour, and increases (decreases) with the reference price effect when consumer strategic behaviour is low (high), indicating a non-monotonity with respect to the coexistence of consumer strategic behaviour and reference price effect. We then extend our study from a centralised system to a decentralised system and find that double marginalisation is effectively weakened by the two effects. Interestingly, the centralised structure may not always be optimal relative to a decentralised structure, indicating a non-monotone relationship between the wholesale price and the profit in decentralised structure.

Suggested Citation

  • Kehong Chen & Yong Zha & Layth C. Alwan & Lu Zhang, 2020. "Dynamic pricing in the presence of reference price effect and consumer strategic behaviour," International Journal of Production Research, Taylor & Francis Journals, vol. 58(2), pages 546-561, January.
  • Handle: RePEc:taf:tprsxx:v:58:y:2020:i:2:p:546-561
    DOI: 10.1080/00207543.2019.1598592
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    Cited by:

    1. Ling Zhao & Anquan Zou & Minghua Xiong & Jun Liu, 2023. "Supply Chain Performance with a Downside-Risk-Averse Retailer and Strategic Customers," Sustainability, MDPI, vol. 15(4), pages 1-18, February.
    2. Zha, Yong & Wang, Yuting & Li, Quan & Yao, Wenying, 2022. "Credit offering strategy and dynamic pricing in the presence of consumer strategic behavior," European Journal of Operational Research, Elsevier, vol. 303(2), pages 753-766.
    3. Chaab, Jafar & Zaccour, Georges, 2024. "Dynamic pricing in the presence of social externalities and reference-price effect," Omega, Elsevier, vol. 122(C).
    4. Rui Qi & Dan Jin & Han Chen & Xichen Mou & Faizan Ali, 2024. "Strategic-level perceived fairness of hotel dynamic pricing: the role of cues and the asymmetric moderating effect of inflation attribution," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 23(3), pages 249-261, June.
    5. Bing Wang & Wenjie Bi & Haiying Liu, 2023. "Dynamic Pricing with Parametric Demand Learning and Reference-Price Effects," Mathematics, MDPI, vol. 11(10), pages 1-14, May.
    6. Martín-Herrán, Guiomar & Sigué, Simon Pierre, 2023. "An integrative framework of cooperative advertising with reference price effects," Journal of Retailing and Consumer Services, Elsevier, vol. 70(C).
    7. Xiaxia Ma & Wenliang Bian & Xiqing Yang & Shengnan Niu & Yongming Cai & Jie Guan & Wenbin Wang, 2022. "Online Retailer’s Contingent Free-Shipping Decisions under Large-Scale Promotions Considering Delayed Delivery," Sustainability, MDPI, vol. 14(17), pages 1-22, August.
    8. Das, Debabrata & Dutta, Pankaj, 2022. "Product return management through promotional offers: The role of consumers’ loss aversion," International Journal of Production Economics, Elsevier, vol. 251(C).
    9. Hsin‐Hui Lin & Pin‐Han Chen & Chih‐Lun Wu, 2023. "Exploring the price anchoring effect in mobile commerce: An experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1601-1623, April.
    10. Liu, Zhuojun & Zhang, Michael & Chen, Jing & Diallo, Claver, 2023. "Buy now or later? New or remanufactured? How to attract strategic customers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 172(C).
    11. Fang Qiu & Qifan Hu & Bing Xu, 2020. "Fresh Agricultural Products Supply Chain Coordination and Volume Loss Reduction Based on Strategic Consumer," IJERPH, MDPI, vol. 17(21), pages 1-25, October.
    12. Ha-Won Jang & Soo-Bum Lee, 2021. "The Relationship between Contact-Free Services, Social and Personal Norms, and Customers’ Behavior for the Sustainable Management of the Restaurant Industry," Sustainability, MDPI, vol. 13(17), pages 1-14, September.
    13. Mehmet Ali Soytaş & Damla Durak Uşar & Meltem Denizel, 2022. "Estimation of the static corporate sustainability interactions," International Journal of Production Research, Taylor & Francis Journals, vol. 60(4), pages 1245-1264, February.

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