Pricing in the presence of strategic consumer behavior

This dissertation addresses the impact of strategic consumer behavior on different pricing strategies. Generally speaking, consumers are strategic in that they correctly anticipate a firms' actions and the behavior of other consumers when they make purchasing decisions. In the context of this dissertation, strategic consumers anticipate purchasing opportunities while taking into account the firm's pricing strategy and the actions of their fellow consumers. For example, consumers may anticipate the expected waiting time for service, the probability to obtain a product, or the probability that the price will be low. We compare different types of pricing strategies that are either commonly applied in practice or widely discussed in the literature. To analyze the effect that such strategic behavior has on the comparison between pricing schemes, we build analytical models in which one or two firms strategically interact (by choosing a pricing strategy and corresponding prices) with a population of strategic consumers (who choose whether and/or when to purchase) to form a "game". This dissertation is composed of three main parts. In the first part, we examine how a firm should price its service and what service rate it should employ when consumers dislike congestion and determine their service requests rationally. We compare two commonly used pricing schemes, pay-per-use and subscriptions, and analyze how employing each of them influences the frequency of service requests, the quality of service, and the firm's ability to generate revenues. In the second part, we examine the pricing decisions of two competing firms facing a strategic customer base that can anticipate future prices. Consumers have uncertain valuations for the products offered by the firms and may delay their purchase in order to learn which product they value more. In the third part, we compare static and dynamic pricing. Although much research has supported dynamic pricing, reality suggests that many firms charge a fixed price. We provide an operational explanation for the use of static pricing. We find that the comparison between different pricing strategies is generally affected when accounting for strategic consumer behavior. Such strategic behavior provides a possible explanation for gaps between theory and practice.