Slides10_Dynamic_Pricing

# Slides10_Dynamic_Pricing - The Information Economy Dynamic...

This preview shows pages 1–8. Sign up to view the full content.

The Information Economy Dynamic Prices 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Peak Load Pricing 2 Suppose a firm has zero marginal cost, with capacity K Broadband capacity, cell phone towers, number of tickets Capacity costs z per unit to build. There are two periods (or two equally likely states) Period L demand is low, p L (q) Period H demand is high, p H (q) Firm chooses q L , q H and K to maximize profits = q L p L (q L ) + q H p H (q H ) zK subject to q L ,q H ≤ K Lagrangian: choose q L , q H and K to maximize L = q L p L (q L ) + q H p H (q H ) zK + L [K-q L ] + H [K-q H ]
Peak Load Pricing 3 Solution FOCs for q L ,q H and K: MR L (q L *)= L , MR H (q H *)= H , z = L + H Optimal capacity: K*=q H * Idea: Charge capacity when constraint binds. Two cases: 1. Constraint slack in period L (big difference in demands) 2. Constraint binds in period L (small difference in demands) Price in H higher for two reasons (a) The demand is higher, (b) Charging more of the capacity Examples: cheap evening calls and Christmas flights

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1. Constraint Slack in Period L (q L *<q H *) 4 Optimal quantities: MR L (q L *)=0, MR H (q H *)= z
2. Constraint Binds in Period L (q L *<q H *) 5 Optimal quantities: q L *=q H *, MR L (q L *)= L , MR H (q H *)= z- L

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Revenue Management 6 A firm has K tickets to sell Airline seats, hotel rooms, advertising slots Customers arrive over time Customers have value v unknown to firm How should firm set prices over time? If lower price then: (a) sell to marginal agents today (b) make less revenue from inframarginal agents (c) lose opportunity to sell tomorrow
Revenue Management: Example 7 Example: one item to sell (K=1)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 16

Slides10_Dynamic_Pricing - The Information Economy Dynamic...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online