Dynamic pricing with product quality information updates considering consumer time preferences

XU Minghui, SHEN Hui, ZHENG Yiwei

Systems Engineering - Theory & Practice ›› 2023, Vol. 43 ›› Issue (10) : 2989-3006.

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Systems Engineering - Theory & Practice ›› 2023, Vol. 43 ›› Issue (10) : 2989-3006. DOI: 10.12011/SETP2022-3029

Dynamic pricing with product quality information updates considering consumer time preferences

  • XU Minghui, SHEN Hui, ZHENG Yiwei
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Abstract

In online retail markets, uncertainty about the quality of emerging products and firms' dynamic pricing lead to the possibility that consumers may engage in strategic waiting and delay the purchase of products. When considering the endogenous time preferences, consumers choose their own purchasing strategy (myopic or strategic), while spending an additional sunk cost of time and effort (called strategic cost) if choosing to be strategic. Based on consumer utility theory, we develop a two-period game-theoretic model, where the firm and consumers simultaneously learn and update perceived quality from online reviews in the second period. We study consumers' purchasing strategies when they have endogenous time preferences, and the impact of such consumers on the firm's pricing strategy. The results suggest that the perceived quality and strategic cost affect consumers' purchasing strategies and lead the firm to implement different dynamic pricing strategy depending on consumers' purchasing strategies. An increase in strategic cost may either increase the firm's profit, consumer surplus and social welfare, or increase the firm's profit at the expense of consumer surplus and social welfare. In addition, an increase in the accuracy of review information does not always benefit the firm. When both the strategic cost and perceived quality are at a high level, more accurate review information may even hurt both the firm's profit and consumer surplus. Also, consumers do not always benefit from strategic waiting behavior compared with the case where all consumers stay myopic.

Key words

strategic consumer behavior / endogenous time preferences / dynamic pricing / Bayesian update

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XU Minghui , SHEN Hui , ZHENG Yiwei. Dynamic pricing with product quality information updates considering consumer time preferences. Systems Engineering - Theory & Practice, 2023, 43(10): 2989-3006 https://doi.org/10.12011/SETP2022-3029

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Funding

National Natural Science Foundation of China (72171181, 72031009); Humanities and Social Sciences Foundation of the Ministry of Education of China (19YJA630095)
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