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Fixed vs. flexible pricing in a competitive market

Selcuk, Cemil and Gokpinar, Bilal 2018. Fixed vs. flexible pricing in a competitive market. Management Science 10.1287/mnsc.2017.2922

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We study the selection and dynamics of two popular pricing policies---fixed price and flexible price---in competitive markets. Our paper extends previous work in marketing, e.g. Desai (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible non-economic aspects of bargaining. We construct and analyze a competitive search model which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that fixed and flexible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More specifically, if customers dislike haggling, then fixed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are offered, and the unique equilibrium exhibits full segmentation: Haggler customers avoid fixed-price firms and exclusively shop at flexible firms whereas non-haggler customers do the opposite. We also find that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario where market demand goes through periodic ups and downs and find that equilibrium prices remain mostly stable despite significant fluctuations in demand. This finding suggests a plausible competition-based explanation for the stability of prices.

Item Type: Article
Date Type: Published Online
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: INFORMS
ISSN: 0025-1909
Date of First Compliant Deposit: 29 August 2017
Date of Acceptance: 9 August 2017
Last Modified: 27 Apr 2018 10:24

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