Competitive dynamic pricing with alternating offers: Theory and experiment

We propose a model of duopolistic dynamic pricing in which a buyer alternates between two sellers for price offers over a finite season. The game ends when the buyer accepts a price offer or the season is over, whichever comes first. Previous research (Granot, Granot, and Mantin 2007) shows that there are successive markdowns in equilibrium when the buyer is myopic; our analysis reveals that a strategic buyer leads to a constant price offer over time. Moreover, lengthening the season increases (generally decreases) both sellers’ profits when the buyer is myopic (strategic). An experimental study largely supports the theoretical predictions when buyer is myopic but to a lesser extent when she is strategic.