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Fixed vs. Flexible Pricing in a Competitive Market

Selcuk, C; Gokpinar, B; (2018) Fixed vs. Flexible Pricing in a Competitive Market. Management Science , 64 (12) pp. 5461-5959. 10.1287/mnsc.2017.2922. Green open access

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Abstract

We study the selection and dynamics of two popular pricing policies—fixed price and flexible price—in competitive markets. Our paper extends previous work in marketing, for example, Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible noneconomic aspects of bargaining. We construct and analyze a competitive search model, which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that fixed and flexible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More specifically, if customers dislike haggling, then fixed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are offered, and the unique equilibrium exhibits full segmentation: haggler customers avoid fixed-price firms and exclusively shop at flexible firms, whereas nonhaggler customers do the opposite. We also find that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario in which market demand goes through periodic ups and downs and find that equilibrium prices remain mostly stable despite significant fluctuations in demand. This finding suggests a plausible competition-based explanation for the stability of prices.

Type: Article
Title: Fixed vs. Flexible Pricing in a Competitive Market
Open access status: An open access version is available from UCL Discovery
DOI: 10.1287/mnsc.2017.2922
Publisher version: https://doi.org/10.1287/mnsc.2017.2922
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: pricing policy, search and matching markets, bargaining, competition, competitive search
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/1569779
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