Two-Period Dynamic versus Fixed-Ratio Pricing Policies under Duopoly Competition

Abstract

This paper introduces a two-period, pricing policy under duopoly competition between two firms offering an identical product to consumers who are intertemporal utility maximization. Firms have equal inventories of faultlessly replaceable and perishable products. The firms adjust prices to maximize profits and determine optimal pricing policies, choosing from dynamic pricing, fixed-ratio pricing, and elastic pricing policies. According to a duopoly competition model, the consumer is limited to a single firm visit per period. The consumer decides to purchase the product at current price from a firm and remain in the market to purchase product from the other firm in the next period or exit the market. The results offer three main conclusions. First, elastic pricing is consistent with dynamic pricing. Second, the more consumers visit the firm in the first period, the more profits the firm will make. Third, we explore the effectiveness of different pricing policies. The results show that although dynamic pricing is a more complex policy than fixed-ratio pricing, it may lead to decreased equilibrium profits when the firms sharply discounts prices and consumer rationality is unlimited.