Working Paper No. 09-10
Intertemporal Price Discrimination: Preference
Knowledge and Capacity Choice
When a firm sells tickets in advance under capacity constraints, as with airlines, concerts, and sports tickets, one observes that in some cases advanced sales are made at a discount while other times a premium is charged. Previous research into this intertemporal price discrimination has focused on either premium or discount pricing but never both. Given that we observer both types of intertemporal price discrimination in markets characterized by advanced sales and capacity constraints, it is important to understand the conditions that determine the nature of the optimal pricing scheme. This paper is the first to shows that the nature of the profit maximizing intertemporal pricing scheme depends on the interaction of consumer preference intensity, preference certainty, and firm capacity. We then examine optimal capacity choice as a function of consumer preferences showing that the choice of capacity will be a negatively related to its cost for a given level of preference intensity and equal to the ex-post demand for one of the goods.