Abstract
Focusing on sellers’ pricing decisions and the ensuing seller-buyer interactions, we report an experiment on dynamic pricing with scarcity in the form of capacity constraints. Rational expectations equilibrium solutions are constructed and then tested experimentally with subjects assigned the roles of sellers and buyers. We investigate behavior in two between-subject conditions with high and moderate levels of capacity. Our laboratory market exhibits strategic sophistication: the price offers of sellers and the buyers’ aggregate responses largely approximate equilibrium predictions. We also observe systematic deviations from equilibrium benchmarks on both sides of the market. Specifically, in our experiment the sellers are boundedly strategic: their prices often exhibit strategic adjustments to profit from buyers with limited strategic sophistication, but they are also often biased towards equilibrium pricing even when that would not be ex-post optimal.
Highlights
Logistics strategies and management of inventory are driven often by the need to optimize profits under changing demand and capacity constraints
We are motivated by the fact that capacity planning and dynamic pricing often require a high level of strategic insights with respect to buyers’ behavior
The sellers in our experiment were boundedly strategic: their prices often exhibited strategic adjustments to profit from buyers with limited strategic sophistication, but they were often biased towards equilibrium pricing even when that would not be ex-post optimal
Summary
Logistics strategies and management of inventory are driven often by the need to optimize profits under changing demand and capacity constraints These problems are aggravated when the capacity is limited and the inventory is temporal in nature as in the operations of transportation or is highly perishable as is the case in many goods retailing. While helping retailers manage their inventory, when consumers (the buyers that retailers face on the demand side) are strategic, retailers’ ability to lower their prices in the future may prove to be a curse rather than a blessing. This is because forward-looking consumers might attempt to pre-empt retailers by waiting strategically, i.e., holding off purchase in anticipation of
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