Dynamic Pricing of Perishable Assets under Competition: A Two-Period Model

This paper presents a two-period model to analyze the dynamic pricing behavior of two profit-maximizing firms that have equal inventories of perfectly substitutable and perishable products. Two versions of the problem are studied. In the first version, firms simultaneously announce their first period prices, observe the sales each makes, and then simultaneously announce their second period prices. In the second version, firms may restrict their sales in the first period by allocating a portion of their inventories. In each period, customers first purchase from the low price firm and then from the high price firm up to their inventories, provided that the prices are lower than their reservation prices. It is shown that a dynamic pricing behavior exists even when there is no uncertainty and no exogenous temporal variation in consumer characteristics. Secondly, it is observed that inventory control may have positive as well as adverse effects on firm profits. Finally, firms are not able to achieve a collusive outcome even when the total inventory is less than the potential demand.