Dynamic Pricing under Downward Sloping Demands

Title: Dynamic Pricing under Downward Sloping Demands

Speaker: José Antonio Carrasco (UAI)

Abstract: We explore the problem of a monopolist selling a stock of a divisible good to a stream of heterogeneous buyers who arrive stochastically. Buyers’ demands are random and downward sloping, leading the seller to trade-off price and quantity as well as revenue and option value. We show that the seller uses a marginalist approach by equalizing marginal revenue to an endogenous marginal cost that reflects lost optionality. We also characterize optimal selling behavior and show that when holding less stock, the seller becomes less willing to sell and charges higher prices for smaller quantities. However, she also exercises less market power unless stock is low enough. This behavior remains optimal when the seller perfectly discriminates and uses dynamic two-part tariff pricing. We also analyze the welfare implications of pricing and the effect of search costs.