Abstract
Dynamic pricing of a firm’s product line enhances sellers’ profits in many industries. This paper proposes a structural empirical framework to control for endogeneity in the presence of dynamic product line pricing under capacity constraints. The approach uses the shadow prices from the firm’s constrained maximization problem to link strategic decisions over time, a middle ground between existing dynamic and static choice models. The framework is applied to data from a major cruise line using a nested logit to represent heterogeneous consumer demand. The results show that demand cannibalization is the primary driver of dynamic pricing and that advertising helps to build category demand. A counterfactual experiment suggests that dynamic pricing accounts for 18% of the seller’s variable profit.
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