Discussion Paper

No. 2016-20 | May 17, 2016
Dynamic Pricing with Reference Price Dependence

Abstract

A firm usually sets the selling price of a product by taking into account consumers’ reference price. A behavioral pricing scheme integrating reference effects would suggest that the higher the reference price, the higher the firm can set the price. In this paper, the author investigates this intuition by accounting for reference dependence in an optimal control framework. Results show that the dynamics of price originates from the sensitivity of customers to reference price. Contrary to intuition, price dynamics is not systematically associated to the evolution of the reference price, but derives from competing effects related to the dynamics of the reference price.

JEL Classification:

C61, M21, D03

Assessment

  • Downloads: 783

Links

Cite As

Régis Chenavaz (2016). Dynamic Pricing with Reference Price Dependence. Economics Discussion Papers, No 2016-20, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-20


Comments and Questions


Anonymous - Referee Report 1
May 17, 2016 - 12:53

The paper “Dynamic Pricing with Reference Price Dependence” establishes the conditions under which the selling price is positively associated to the reference price. Consequently, the results undermine the idea that the optimal price monotonically decreases with the reference price or with the adjustment speed. As the core result, the author ...[more]

... identifies the rule of dynamic pricing (expression (12) in manuscript), which enables deriving drivers to pricing policies in managerial situations. This pricing rule can thus characterize both skimming and penetration pricing policies.

First, I want to commend the author(s) on their very rigorous analytical approach. The calculations appear sound and the proofs sensible. The paper is decently written. Overall, the author’s work is excellent. So, this paper can be published after the following points are addressed.

1. In Introduction, it is better to point out the novelty of this work, instead of listing previous researches.
2. Please state the meanings of the three parameters , and in expression (3), clearly.
3. Since the reference price is a psychological construct, for clarity the author(s) are advised to address the following in Discussion and Conclusion:

Reference price plays a role observable on the decision of consumers, but it is not that we have practical examples of all theoretical effects, especially for the indirect effects (even though they may play a role). Still, it is interesting from a theoretical point of view to know that these effects can exert influence on the pricing policy. But a possible theoretical effect at play is a sales effect. Higher reference point increases demand. So the firm may be tempted to increase the selling price. But sales increase with higher reference price even more if the selling price decreases. So this indirect effect of the reference price plays in the opposite direction of the direct effect of the reference price. Therefore, if the indirect effect is larger than the direct effect, then an increase in the reference price implies a reduction of the selling price. Because this indirect effect theoretical and based on a psychological construct, it is hard to find an example. But this does not imply that the effect does not play a role. More importantly, if the firm disregards this counter-intuitive effect, then it looses money.


Régis Chenavaz - Reply
May 24, 2016 - 15:23

At first, I thank the Reviewer for its careful and useful suggestions in three comments that will help improve the article quality in the next version. Hereafter is the point-by-point list of replies to the three comments.

COMMENT
1. In Introduction, it is better to point out the novelty ...[more]

... of this work, instead of listing previous researches.
REPLY: Thanks for this advice. In the next version of the article, I will change the introduction to meet your proposition.

COMMENT
2. Please state the meanings of the three parameters , and in expression (3), clearly.
REPLY: Thanks for asking for this clarification. In the function demand
D = a - delta*p - gamma*(p - r), with a, delta, gamma > 0.
Here, a defines the market potentiel, delta is the marginal impact of price on demand, and gamma measures the reference effect (if gamma tends to 0, the reference effect does not play a role).
The revised version of the article will take into account these clarifications.

COMMENT
3. Since the reference price is a psychological construct, for clarity the author(s) are advised to address the following in Discussion and Conclusion:
REPLY: Thanks for proposing this clearer formulation. The next version of the article will integrate this discussion.


Jiddah M.A. Ajayi - recommendation
May 18, 2016 - 12:35

it is a well thought-out paper,so interesting& enriching.
i strongly recommend the article.


Régis Chenavaz - Reply
May 31, 2016 - 10:58

Many thanks for this nice recommandation.


Anonymous - Referee Report 2
June 06, 2016 - 08:52

see attached file


Régis Chenavaz - Reply
June 16, 2016 - 00:40

Please find attached my answers to Reviewer 2.


Anonymous - Comments
June 15, 2016 - 14:18

The following are my personal comments on "Dynamic Pricing with Reference Price Dependence".


Régis Chenavaz - Reply
June 30, 2016 - 22:34

At first, I would like to thank the anonymous Reader, who provided help that I appreciate. The Reader took the time to carefully examine the article. He also raised interesting questions and made useful suggestions that will increase the interest of the article.

Unfortunately, I reply to the comments ...[more]

... of Referee 2 after that the Reader made his comments. In my reply to Referee 2, I adress some of the issues raised by the Reader. The revised version of the manuscript to be proposed will also fix the aditional concerns of the Reader.