Research on Price Dynamics and Mechanism Design in Perishable Goods Markets

Supported by NSF Grant SES 0850441

This area of research examines the behavior and design of markets for 'perishable goods', defined as goods that lose their value at some fixed point in the future (examples include event or airline tickets and seasonal products).  It also uses the setting of perishable goods, which provide intertemporal variation in buyers' and sellers' incentives, to understand phenomena that exist across many other types of markets. 

The research covers three distinct projects:

(1) understanding price dynamics: this project uses new data from secondary markets for event tickets to examine and explain price dynamics in perishable goods markets, in particular testing whether sellers' pricing behavior is consistent with theoretical models of revenue management (Talluri and van Ryzin, 2004).  Revenue management models have been widely used to guide the pricing and capacity decisions of companies in many industries.  For example, Robert Crandall, the former head of American Airlines, regarded revenue management as “single most important technical development in transportation management since we entered the era of airline deregulation in 1979”, but there has been almost no research in economics aimed at understanding the empiricial relevance of revenue management models (McAfee and te Velde, 2006). The paper also considers the extent of strategic consumer behavior in these markets.  A paper (which is under revision for the Journal of Political Economy) is available here:
"Price Dynamics in Perishable Goods Markets: The Case of Secondary Markets for Major League Baseball Tickets".
(2) optimal pricing behavior and competition: most of the revenue management literature assumes that there is a single monopoly seller.  This is rarely true in practice, as different sellers compete to offer similar products.  With competition, sellers are likely incentivized to price in ways that may impact their competitors' future prices.  This project uses new data from secondary markets for event tickets to estimate an innovative continuous time model of demand and seller interaction, which allows us to understand how competitive interactions affect a seller's optimal pricing policy.  I use data on event tickets partly because data is available but also because dynamic pricing between large competing sellers is now an important phenomena in these markets as event promoters and their ticketing partners begin to use dynamic pricing to compete with secondary market brokers.  For example, LiveNation has described introducing dynamic pricing as a key element in its strategy.  The modeling framework developed by this project is also being used in work understanding how competitive dynamic pricing affects pricing outcomes for non-perishable products.
(3) market design (auctions vs. fixed prices): very simple economic models suggest that sellers should typically prefer to use auctions rather than fixed prices.  However, fixed prices are widely used throughout the economy, and they are even becoming the most common form of pricing on eBay where it is straightforward for sellers to use auctions.  It is important for market designers to understand what makes fixed prices so popular.  This project seeks to understand sellers' choices of sales mechanism in the secondary market for perishable event tickets.  While perishable goods markets are important in their own right, they also provide an ideal environment for studying sellers’ incentives about which mechanism to use as we can observe individual sellers switching between using fixed prices and auctions depending on the remaining life of the product.