“Optimal Best Price Policy” by Zhiyun Frances XU
Zhiyun Frances XU
A Best Price Policy is a promise to refund customers the difference between the price they pay and the lowest future price charged within some time horizon. The choice of policy length affects whether a BP policy may attenuate the effects of the Coase conjecture. We characterize the finite optimal BP policy length within a certain class of demand uncertainty over time, and show that BP can strictly improve the profit for a seller that cannot otherwise commit, however BP decreases pricing flexibility which makes it impossible to achieve the theoretically optimal profit under demand uncertainty. We also show that increasing the refunds scale cannot improve profit under BP and refunds do not happen on the equilibrium optimal for the seller.