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Does Responsive Pricing Smooth Demand Shocks?

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  • Pascal Courty
  • Mario Pagliero

Abstract

Using data from a unique pricing experiment, we investigate Vickrey’s conjecture that responsive pricing can be used to smooth both predictable and unpredictable demand shocks. Our evidence shows that increasing the responsiveness of price to demand conditions reduces the magnitude of deviations in capacity utilization rates from a pre-determined target level. A 10 percent increase in price variability leads to a decrease in the variability of capacity utilization rates between 2 and 6 percent. We discuss implications for the use of demand-side incentives to deal with congestible resources.

Suggested Citation

  • Pascal Courty & Mario Pagliero, 2008. "Does Responsive Pricing Smooth Demand Shocks?," Economics Working Papers ECO2008/01, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2008/01
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    More about this item

    Keywords

    Consumer demand; responsive pricing; capacity utilization; price variability;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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