An Experimental Study of Posted Prices

In industries with perishable goods dynamic pricing schemes are often used and many models have been proposed to maximize seller’s revenues. These models either assume that customers are myopic and are not forward looking or customers are strategic and anticipate future prices. In the second stream, a standard assumption is that customers maximize their expected utility. We use laboratory experiments to gain insights into how customers make purchase decisions when they have the option of buying at a higher price or waiting for a lower price but incur the risk of the product being out of stock. We find that the quantal response model (QRM), a quasi- rational model, provides a more accurate description of customers’ decisions. If decision making is consistent with our experimental findings, then pricing models that are based on the assumption that customers are rational expected utility maximizers can result in significant loss in profitability. We also study how customers learn in these types of settings.