Optimal dynamic pricing with popularity effects

Abstract

In this thesis, we study the impact of consumer-generated popularity on a firm's dynamic pricing strategy in presence of strategic customers. Particularly, the firm sells products over two periods. In our model, consumers' valuation of the product in the second period can be directly affected by the observed popularity. Facing with this valuation uncertainty, customers behave strategically and weigh the payoff of immediate purchases against the expected future utility of delaying their purchases. In anticipation of consumers' purchasing behavior being affected by popularity, the firm can respond by its pricing strategy and thus control the popularity of the product over time. We demonstrate that how much consumers care about the popularity of the product makes a big difference to the firm's optimal pricing policy. Surprisingly, if consumers care much about the popularity, markup pricing policy can be optimal. Moreover, the firm always benefits from the consumer-generated popularity effect. Interestingly, with the popularity effect, the firm can sometimes get better off due to consumers' strategic waiting. Finally, consumer surplus can also benefit from the popularity effect, but the more popular is not always the better.

Date of Award	2015
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology