Price optimization in consumer irreversible decision

Abstract

This article is about finding the price optimizations of sequential stores. We specifically focused on the market in which consumers passively face stores and could not make reverse their choice. Then, we discussed how stores should behave; especially they should set a price to maximize profit is considered. Based on the findings of the consumers’ behavioral tendency in this irreversible market, we modeled the demand function of the each stores and found the prices at which they can make the most profit. Stores set their prices based on the price of the previous store and the previously located stores’ average prices. These optimized prices are differentiated by the consumers’ market situation. Furthermore, we considered the consumer group which buys a product regardless of the prices because of their search costs. We found out that based on the consumers’ characteristics in this market, the optimized prices of the stores are differentiated and there is not an equilibrium price which all stores set the same price In numerical studies, the effects of the market parameters and the dynamics of the optimized price are examined. Based on our demand function, we found out that if the previous store price is low, the store needs to set their price higher since there is certain portion of consumers who do not care the price at all. This changes the consumer’s recognition of the prices and could give the other stores more profits also. Thus, the effects of different market situation are also considered in the numerical study.