Dynamic Pricing under Loss Aversion : To Match Own-Price, or Not?

We consider a monopolist who is facing loss-averse buyers over two periods, with an uncertain demand in the second period. Monopolist cannot commit today to a future price, and posts the price for tomorrow only after the demand realization. We incorporate best-price provision policy into the monopolist’s problem, in the form of a most-favored-customer (MFC) clause, which is an own-price-match guarantee. We solve the dynamic pricing problem of such a monopolist under loss aversion both with and without an MFC clause. We show that for a wide range of discount factors, the monopolist optimally adopts MFC if and only if the buyers are loss-averse. The result holds for any discount factor when buyers are sufficiently loss-averse. We also make inferences on the residual demand, which reflects the set of buyers who choose to wait for tomorrow to purchase