Sequentially Pricing Multiple Products: Theory

Advances in technology enable sellers to price discriminate based upon a customer’s revealed purchasing intentions. E-tailers can track items already in a “shopping cart” and item level RFID tags enable retailers to do the same in bricks and mortar stores. As retailers attempt to leverage the information made available from these technologies, it is important to understand how this new visibility impacts pricing and market outcomes. This paper examines the theoretical implications of sequential pricing of multiple products. Specifically, the paper focuses on goods that have independent values, goods that have values which are positively or negatively correlated, and goods with super-additive or sub-additive values (i.e. complements or substitutes). The results indicate that sequential pricing increases profit relative to simultaneous pricing when the goods are substitutes. Further, when sellers can condition the second good’s price on the buyer’s decision to purchase the first good, sequential pricing increases profits relative to mixed bundling when the goods are highly positively correlated. The paper also uses experiments to examine sequential pricing in competitive markets where a fraction of customers comparison shop. The behavioral results indicate that conditional pricing does not lower social welfare or harm consumers when customers observe prices sequentially. Further, the ability to price discriminate does not change the price of the initially offered good, but does change the price of subsequently offered good. A comparison with previous bundling experiments suggests that sellers may be better able to extract surplus from consumers using sequential pricing rather than bundling.