Randomized Markdowns and Online Monitoring
We present empirical evidence that monitoring products online is associated with successfully obtaining discounts. Further, we develop a structural model of consumers’ dynamic monitoring to find substantial heterogeneity in consumers’ opportunity costs for an online visit ranging from 2 to 25$. A randomized markdown policy benefits retailers by combining price commitment with the exploitation of heterogeneity in consumers’ monitoring costs. We estimate that the retailer’s profit under randomized markdowns is 81% higher than from subgame-perfect, state-contingent pricing, because the retailer need not limit its inventory to credibly limit markdowns.