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Author:

• Zhiyun XU
  Northwestern University

A best-price policy (BP) is a promise by a seller to give her customer a refund if she reduces her price after the customer has already purchased the product. We characterize the optimal BP policy when the seller can control both the policy length (when the promise expires) and the refund scale (what portion of the price difference is refunded) and provide conditions under which the optimal policy length is finite. In our model, consumers' valuations decline over time, and a finite-length BP allows the seller to commit not to lower her price too soon, but at the same allows her to capture some of the benefits of intertemporal price discrimination. However, because the decline in consumers' valuations is uncertain, a BP does not allow the monopolist to achieve the profit she could earn with full commitment.