An Experimental Study for Analysing Pricing Decisions Under Competition

Abstract

Accepted by: M. Zied BabaiAlthough pricing models of revenue management can considerably improve the profitability of firms, it is not evident whether real-life decision-makers follow them precisely in making price decisions. The effect of sequential anchors on the pricing decisions especially remains understudied. This study aims to investigate the decision-making patterns of human beings in setting prices for homogeneous goods in a competitive market. Two laboratory experiments have been designed and conducted, the former involving a competitor firm with a fixed price, while in the latter, the competitor's price changes over time. The results show that decision-makers are more prone to the 'anchoring effect' when they encounter varying competitor prices. This bias could override the learning effect and is not statistically different across the two genders. Moreover, 'underpricing' is frequently observed in this setting, and a higher variance in demand could deteriorate the quality of pricing decisions. The competitor's prices act as sequential anchors, and several insights are derived regarding the size and extent of anchoring tendency under various patterns of sequential anchors. More generally, the results of the experiment bring practical insights regarding how to enhance pricing decisions for managers in stochastic demand settings with varying parameters.