Competitive Dynamic Pricing Under Capacity Constraints: An Experimental Study

Abstract

Keeping up with competitors’ prices is one of the top operational challenges in pricing. However, competitive interactions in revenue management have not received much research attention in the past due to their complexity. We conduct a series of laboratory experiments to investigate the dynamic pricing behavior of two capacity-constrained firms under competition. Our experiments initially control for strategic interactions between the sellers and then allow for them. To gain a broader understanding, we also manipulate demand uncertainty and the expected market size. Our results confirm the dependency of dynamic pricing decisions on the competitor's behavior. We find that the theory is much more forgiving—in the sense that it predicts a lower level of competition among the sellers—than what we actually observe in the laboratory. The modeling literature indicates that the seller with the lower capacity has a competitive advantage, but our results reveal the opposite. Further, there is potential for high-capacity sellers to benefit from competition. Sellers tend to underprice (resp., overprice) their units at the beginning (resp., end) of a selling season. Also, competition lasts longer than the theory predicts, and customers benefit from the biases of the competing sellers. The higher-capacity seller following the best-response policy is not harmed due to the biases of the competitor. However, the lower-capacity seller's performance is greatly influenced by the competitor's degree of rationality.