Title: Static versus Contingent Pricing under Competition

　　Lecturer： Zizhuo Wang. Department of Industrial and System Engineering • University of Minnesota.

　　Host：Deng, Shiming

　　Time：AM 9:00 on Dec.28

　　Place: Room 219 in the School of Management

　　Abstract： Should firms price respond dynamically to demand uncertainty under competition? We study a duopoly selling differentiated substitutable products with fixed capacities under demand uncertainty, where firms can either commit to a static pricing strategy ex ante, or elect to price contingently ex post, e.g., to charge high prices in booming markets, and low prices in slack markets. Somewhat surprisingly, we show that even for completely symmetric model primitives, a unique asymmetric equilibrium of strategic pricing decisions may arise, where one firm commits statically and the other prices contingently. Such equilibrium behavior tends to emerge, when capacity is ample, and products are more homogenous or demand uncertainty is lower.

　　With asymmetric fixed capacities, if demand uncertainty is low, a unique asymmetric equilibrium emerges where the firm with more capacity chooses static pricing and the firm with less capacity chooses contingent pricing. We identify two countervailing profit effects of contingent pricing under competition: gains from responsively charging high price under high demand, and losses from intensified price competition under low demand. It is the latter detrimental effect that may prevent both firms from choosing a contingent pricing strategy in equilibrium. Similar insights apply when model primitives become asymmetric and when the marketplace consists of more than two firms. (This is a work with Ming Hu)