Dynamic pricing in the presence of social externalities and reference-price effect


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This paper considers the pricing of a new product in the face of sophisticated consumer behaviors. At the individual level, consumers are forward-looking, whereby they may wait strategically for intertemporal arbitrage. Additionally, and in line with prospect theory, consumers might also look back to form a reference-price point with which they can compare the current price. Consumers are assumed to be loss averse where losses resonate more than gains. At the aggregate level, we account for the role of social influences in the form of externalities in consumers' adoption decision. We develop progressively different nested models to account for impact of each behavior. We find that skimming pricing strategy is advocated by reference-dependent loss-averse behaviors, whereas the penetration pricing strategy functions better in the presence of strong forward-looking behavior and social influences.

, 25 pages

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