Abstract

We study a dynamic pricing problem in which a firm chooses prices over multiple periods when consumers are state dependent, i.e., they develop a habit or satiation from their past consumption. We first derive an inter-temporal demand function to capture how demand in one period depends on the price in that period and consumption in previous periods through habit or satiation. Subsequently, we formulate the optimal price setting problem for a firm over a multi-period horizon. We establish that this problem is jointly concave in prices and then characterize the temporal trends in the optimal prices. These trends in optimal prices are a net outcome of two opposite effects: (i) the progressive build up of habit or satiation from consumption, and (ii) the progressive deterioration of the habit or satiation developed in prior periods. Based on the relative strengths of these two effects, the optimal prices follow either a penetration policy (prices increase over time), or a skimming policy (prices decrease over time), or a skimming-penetration policy (U-shaped prices), or a penetration-skimming policy (Inverse-U-shaped prices). Subsequently, we provide several extensions including bounds on prices and optimal profit and non-stationary state dependence. Numerical studies show that ignoring habit and satiation effects in customers can be significantly costly for a firm.

About the Speaker

Dr. Ying He is an associate professor at the Strategic Organization Design unit of the department of business and management, University of Southern Denmark. He has two major research areas: 1) decision theory and decision analysis, mainly from axiomatic perspective; 2) application of decision making models in different operations management and other business problems. He obtained his Ph.D. in Management Science from the University of Texas at Austin in 2013. Recently, he becomes more interested in decision making under ambiguity in both static and dynamic settings. Besides developing theoretical models, he is also interested in applying these models in different business problems. His research has been published in Management Science, Operations Research, Production and Operations Management, European Journal of Operational Research, Journal of Mathematical Economics and other major business journals.

In 2010, his paper titled “Decomposing a Utility Function Based on Discrete Distribution Independence” was awarded the first-place in the student paper competition sponsored by the Decision Analysis Society of INFORMS. In 2019, his paper titled “Revisiting Ellsberg and Machina's Paradoxes: A Two-Stage Evaluation Model under Ambiguity” was selected as “Jaffary Lecture” at the Risk, Uncertainty, and Decision (RUD) conference held at Paris School of Economics. He is an elected council member of Decision Analysis Society of INFORMS from 2021 to 2024.