Optimal Pricing with Speculators and Strategic Consumers

Abstract

This paper studies a monopolist firm selling a fixed capacity. The firm sets a price before demand uncertainty is resolved. Speculators may enter the market purely with the intention of resale, which can be profitable if demand turns out to be high. Consumers may strategically choose when to purchase, and they may also choose to purchase from the firm or from the speculators. We characterize equilibrium prices and profits and analyze the long-run capacity decisions of the firm. There are three major findings. First, the presence of speculators increases the firm's expected profits even though the resale market competes with the firm. Second, by facilitating resale, the firm can mimic dynamic pricing outcomes and enjoy the associated benefits while charging a fixed price. Third, speculative behavior may generate incentives for the seller to artificially restrict supply, and thus may lead to lower capacity investments. We also explore several model extensions that highlight the robustness of our results.Keywords dynamic pricing, speculation, resale, strategic customer behavior, competition Disciplines Marketing | Sales and MerchandisingThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/oid_papers/165Electronic copy available at: http://ssrn.com/abstract=1441533 Optimal Pricing with Speculators and Strategic Consumers Xuanming SuHaas School of Business, University of California, Berkeley, CA 94720 AbstractThis paper studies a monopolist firm selling a fixed capacity. The firm sets a price before demand uncertainty is resolved. Speculators may enter the market purely with the intention of resale, which can be profitable if demand turns out to be high. Consumers may strategically choose when to purchase, and they may also choose to purchase from the firm or from the speculators. We characterize equilibrium prices and profits and analyze the long run capacity decisions of the firm.There are three major findings. First, the presence of speculators increases the firm's expected profits even though the resale market competes with the firm. Second, by facilitating resale, the firm can mimic dynamic pricing outcomes and enjoy the associated benefits while charging a fixed price. Third, speculative behavior may generate incentives for the seller to artificially restrict supply and thus may lead to lower capacity investments. We also explore several model extensions that highlight the robustness of our results.

Advance Selling in the Presence of Speculators and Forward‐Looking Consumers

“…Hence, even if early sales have a positive effect on late demand arrival, the seller may still limit the advance sales to rein in the competition from resellers in the spot period. These findings generalize Su () in which it was shown that speculators lose their role as proxies for dynamic pricing but become pure direct competitors once the seller switches from a static pricing strategy to a dynamic one, resulting in the seller pricing the speculators out of the market. On the contrary, our model extends the role of speculators to include the possibility that speculators may serve to enhance product diffusion when they buy in advance.…”

“…Furthermore, consumers are modeled as either myopic or forward‐looking, and thus resemble the different purchase decisions among the consumers due to intertemporal differences, with the latter being more long term in perspective. Our model generalizes Su () along several dimensions. First, we allow for the valuations of the consumers, although exogenous, to change over time.…”

Strategic obfuscation of production capacities

“…While the literature has also studied the impact strategic shortages may have on consumer behavior , it has failed to properly address the impact strategic shortages (or the appearance of shortages) may have on competing producers. With this article, we seek to fill in this gap in the literature.…”

“…On the consumer side, show that strategic shortages can be used by producers as a quality signaling device. In particular, they show that high‐quality producers may strategically create scarcity for their products to signal consumers about their product quality; relatedly shows that producers may choose to cut capacity in the presence of speculators. These works are complementary to ours.…”

Strategic Obfuscation of Production Capacities

“…While the literature has also studied the impact strategic 3 shortages may have on consumer behavior [31,32], it has failed to properly address the impact strategic shortages (or the appearance of shortages) may have on competing producers. With this article, we seek to fill in this gap in the literature.…”