Dynamic pricing with fairness concerns and a capacity constraint

Abstract

Although some firms use dynamic pricing to respond to demand fluctuations, other firms claim that fairness concerns prevent them from raising prices during periods when demand exceeds capacity. This paper explores conditions in which fairness concerns can or cannot cause shortages. In our model, a firm announces a price policy that states its prices during high and low demand, and customers must travel to a venue to learn the current price. We show that the interaction of fairness concerns with travel costs can cause the firm to set stable prices, which leads to shortages during high demand. However, if the firm is able to inform customers about the current price before they incur any travel costs, then dynamic pricing with no shortages is optimal even with strong fairness concerns. * Helpful comments were provided by Anthony Dukes, Jeanine Miklós-Thal, Daniel Mochon, Cristina Nistor, Mohammad Zia, and seminar participants at Chapman, Florida, UC Irvine, and the 2019 Marketing Theory Symposium. Peter Selove inspired me to work on this project.