Strategic retailers and myopic consumers: Competitive pricing of perishable goods

•Experimental study where two retailers compete to sell perishable goods over a finite horizon.•Three between-subject experimental conditions where retailers start with varying inventory levels.•Equilibrium best-response accounts well for mean posted prices.•Small systematic deviations from equilibrium significantly diminish the retailers’ profits.•Pricing deviations decrease considerably with experience. We present an experimental study of dynamic pricing in which two retailers compete to sell perishable goods over a finite horizon. Consumers arrive at the market one at a time and remain there for a single period. Each consumer compares the two simultaneously posted prices, one by each retailer, and then decides probabilistically whether to purchase the good from Retailer 1, from Retailer 2, or not purchase it at all. The competing retailers are assigned to one of three between-subject experimental conditions. In one condition they start each session with equal inventories and in two other conditions with unequal inventories. Following a short learning period, equilibrium best-response solutions, which serve as benchmarks for our analysis, account well for the mean posted prices; however, small but systematic deviations from equilibrium play significantly diminish the retailers’ profits. These deviations decrease considerably in size with experience.