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Abstract and Applied Analysis
Volume 2016, Article ID 3254240, 8 pages
http://dx.doi.org/10.1155/2016/3254240
Research Article

Pricing Strategy versus Heterogeneous Shopping Behavior under Market Price Dispersion

1Department of Economics, Universidad Complutense de Madrid, Madrid, Spain
2Department of Economic Analysis, Universidad Complutense de Madrid, Madrid, Spain
3Department of Psychology, Harvard University, Cambridge, MA, USA
4Department of Economics, ICADE, Universidad Pontificia Comillas, Madrid, Spain
5Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid, Madrid, Spain

Received 8 August 2016; Accepted 10 November 2016

Academic Editor: R. Company

Copyright © 2016 Francisco Álvarez et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We consider the ubiquitous problem of a seller competing in a market of a product with dispersed prices and having limited information about both his competitors’ prices and the shopping behavior of his potential customers. Given the distribution of market prices, the distribution of consumers’ shopping behavior, and the seller’s cost as inputs, we find the computational solution for the pricing strategy that maximizes his expected profits. We analyze the seller’s solution with respect to different exogenous perturbations of parametric and functional inputs. For that purpose, we produce synthetic price data using the family of Generalized Error Distributions that includes normal and quasiuniform distributions as particular cases, and we also generate consumers’ shopping data from different behavioral assumptions. Our analysis shows that, beyond price mean and dispersion, the shape of the price distribution plays a significant role in the seller’s pricing solution. We focus on the seller’s response to an increasing diversity in consumers’ shopping behavior. We show that increasing heterogeneity in the shopping distribution typically lowers seller’s prices and expected profits.