Optimal Pricing of Nondurables when Demand is Dynamic and Stochastic

This paper derives optimal pricing strategies for nondurables if demand is sluggish and stochastic. The puzzling result is that moving from a static demand to a dynamic relation alters the marketing strategy dramatically if the equilibrium demand is convex (in price): the profit maximizing price policy is to switch between a low and a high price depending on current demand while a continuous price policy is optimal for concave demand relations. However, the formal existence of such a price switching policy is restricted to the anyway more realistic stochastic version of the model. The clear cut implications of the model provide also a criterion to test empirically the characteristics and the optimality of actual price strategies.