Technical Note—Intertemporal Price Discrimination via Reference Price Effects

Abstract

We consider the dynamic pricing problem a monopolistic seller faces when customers arrive in heterogeneous time periods and their purchase decisions are affected by reference prices formed from their past observations of prices. We illustrate that a new form of price discrimination opportunity exists in such situations, where the seller’s optimal pricing strategy is a cyclic one, even when the customers are loss-neutral and their demand functions are identical. This result differs from those of prior studies where the optimal price paths are shown to be asymptotically constant and thus is unique due to the interaction between the heterogeneous arrivals and the reference price effects. We also provide the cycle length of the optimal pricing policy when the demand function is linear and when customers are loss-neutral. In this era when customer information is easier accessible, our results suggest the sellers consider this new dimension of price discrimination in conjunction with the old ones, to take advantage of the full power of customer data.