Strategic Buyer Behavior in Markets with Dynamically Priced Goods

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Theoretical work on revenue management in a dynamic, multi-period environment has largely been based on the assumption that customers are myopic; namely, that they purchase a good as soon as its price falls below a fixed maximum price that they are willing to pay. Consequently, the focus of research has been on the pricing or inventory decisions made by the seller. The simplifying assumption that buyers are myopic also underlies the experimental research in this area. Research conducted under this award shifts the emphasis to the theoretical and experimental investigation of customers who are assumed to be strategic and rational; ones who are willing to delay their purchase of a perishable good (e.g., an airline ticket or a fashionable dress) in order to exploit potential future price reductions. The research involves developing models prescribing how a rational and strategic buyer should act and then testing the descriptive power of these models in carefully controlled experiments. These experiments involve implementing the assumptions of the model in a computer-controlled laboratory with participants assuming the role of buyers who receive monetary payoffs contingent on their performance. Decisions made in these experiments will be recorded, observed behavior compared to that prescribed by a model of optimal behavior, and any replicable and systematic differences between observed and predicted behavior (e.g., buyers may delay their purchase for too long or, alternatively, may buy too early given their expectations about future price paths) identified. Practical implications for both sellers and buyers engaged in the selling and buying of perishable goods in a multi-period season will also be derived.