Optimal Pricing of Conspicuous Consumption Goods and Imperfectly Durable Products


Student thesis: Doctoral Thesis

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Award date5 Jun 2020


Motivated by some significant phenomenon of consumer behavior and business innovation in today’s market, this thesis discusses the optimal production and pricing strategy under those contexts. The first one analyzes the optimal pricing and rationing strategy when considering the speculation behavior in some popular even hot product market. The second one induces an innovative leasing model known as Rent to Own (RTO), and identifies conditions under which one retailer should adopt the RTO or pure leasing or selling strategy when the depreciation rate of the durable product is uncertain.

This thesis comprises two essays. The first essay studies a monopolist firm selling products with adjustable capacity. The firm decides the pricing strategy and rationing policy at the beginning of the selling season. A scalper may enter the market purely with the intention of reselling and decide how many products to sell and the reselling price. Conspicuous consumers—that is, those who show a stronger purchase desire when the product is difficult to obtain—must choose to purchase from the firm or from the scalper. With a deterministic model, we analyze the optimal prices and quantities decisions of the firm and the scalper and the profits of each. There are three major findings. First, the scalper will join the market whenever the firm introduces scarcity, even if there are no uncertainty in the market. Second, the firm and the scalper can both benefit from customers’ conspicuous consumption. Third, the scalper’s speculative behavior may generate incentives for the firm to decrease the supply of products on purpose, which will increase the profits of both the firm and the scalper. The existence of the scalper will also increase consumers’ surplus when their level of consumption conspicuousness is rather high. Then I also explore an extension that highlights the robustness of our results.

The second essay studies a durable good monopolist retailer facing consumers who exhibit homogeneous valuation but heterogeneous depreciation rates under three schemes: pure leasing, selling and RTO. We apply a twoperiod game-theoretic model in each of the three schemes. In the pure leasing model, consumers choose to rent old or rent new in period two. In the selling model, the consumers who buy a new product in the first period can choose to keep using the old product or buy a new product in the second period based on their own realized depreciation rate and new product price. In the RTO model, consumers who rent a new product in the first period can choose to buy the product at a certain price or return it and lease a new one based on their own realized depreciation rate and the prices of the two options. The paper analyzes the optimal pricing strategy of the retailer in each of the three schemes under different levels of depreciation rate uncertainty, product cost and salvage value. We also identify conditions under which one scheme dominates the other two schemes. Specifically, we find that the uncertainty in the depreciation rate is vital to explain the profitability of RTO in that when the depreciation rate is a constant, the retailer’s profit is identical across the three schemes. However, as the uncertainty of the depreciation rate increases, the retailer may not prefer the RTO scheme.