Monopoly pricing with buyer search

TL;DR

This paper studies how a monopolist can optimize pricing when buyers search through a dynamic menu, balancing low prices to retain interest and high prices for revenue, revealing new optimal strategies in such settings.

Contribution

It introduces a simple, approximately optimal dynamic pricing mechanism that leverages bait items and multiple rounds to maximize revenue under buyer search behavior.

Findings

Optimal dynamic pricing differs from static scenarios.

A simple mechanism using bait items is approximately optimal.

The approach balances low prices and high-priced items to retain buyer interest.

Abstract

In many shopping scenarios, e.g., in online shopping, customers have a large menu of options to choose from. However, most of the buyers do not browse all the options and make decision after considering only a small part of the menu. To study such buyer's behavior we consider the standard Bayesian monopoly problem for a unit-demand buyer, where the monopolist displays the menu dynamically page after a page to the buyer. The seller aims to maximize the expected revenue over the distribution of buyer's values which we assume are i.i.d. The buyer incurs a fixed cost for browsing through one menu page and would stop if that cost exceeds the increase in her utility. We observe that the optimal posted price mechanism in our dynamic setting may have quite different structure than in the classic static scenario. We find a (relatively) simple and approximately optimal mechanism, that uses part of the items as a "bait" to keep the buyer interested for multiple rounds with low prices, while at the same time showing many other expensive items.