The Cost and Benefit of Dynamic Pricing

Abstract

We analyze the firm-external effects of dynamic prices in a sequential market with a monopolistic firm. The product is offered to an infinite sequence of rational consumers each of whom observes a private signal regarding the product quality. We show that dynamic prices are necessary for asymptotic learning, that is, for market interaction to asymptotically reveal the product quality.
If prices are adjusted periodically to be informationally efficient, that is, to reflect the accumulated information, then asymptotic learning occurs. However, the higher the frequency with which prices are informationally efficient, the lower is expected welfare. Thus, we identify a trade-off between allocational and informational efficiency.