Dynamic Pricing With Recommendation and Consumer Feedback

ABSTRACT A long‐lived seller sells a new product of unknown value by offering prices and recommendations to short‐lived consumers in continuous time. The seller receives consumer feedback about the product at a rate that increases with the instantaneous sales volume. The optimal selling mechanism features episodes of price discounts, during which the seller discontinuously lowers the price and offers unwarranted recommendations to consumers. The optimal pricing strategy depends on the nature of consumer feedback and may involve early or late discounts, dynamic price backtracking, and below‐cost pricing.