Dynamic pricing research based on customers’ limited rational behavior in a competitive environment

Yuhang Zhang

doi:10.61187/mi.v3i2.214

Authors

Yuhang Zhang
003058@nuist.edu.cn
School of Management Engineering, Nanjing University of Information Science and Technology, Nanjing 211100, China

Keywords:

Dynamic pricing, Boundedly rational customer, Green product, Competition

Abstract

In a competitive environment, a firm manages revenue through dynamic pricing, and customers obtain purchasing knowledge from previous customers through multiple channels before making purchasing decisions. This behavior, which can improve customers’ bounded rationality level to choose when and which type to purchase, has a great influence on a firm’s profit. This paper assumes that two companies produce products with different properties (green and regular properties) and that the payment preferences of customers for these products are heterogeneous and obey a uniform distribution. We build a two-period dynamic pricing model according to customers’ boundedly rational behavior. We discuss how the property difference and bounded rationality level impact the profit of a company by comparing the Nash equilibrium obtained from static pricing and dynamic pricing, and we discuss this under the situation of only exiting myopic customers. This paper concludes that decision makers should survey information about customers’ bounded rationality levels, payment preferences and product differences before implementing a dynamic pricing strategy.

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