Responsive pricing

We study the efficiency property of responsive pricing, a scheme that proposes to increase prices as a function of the level of capacity utilization in environments where traditional allocation schemes (e.g. competitive markets, non-linear pricing) cannot be implemented in practice. We show that although responsive pricing implements allocations that are arbitrarily close to full capacity utilization (no wasted capacity and no excess demand), these allocations are not always efficient. We identify conditions under which efficiency occurs and discuss implications for the use of responsive pricing. We would like to thank seminar participants at the LSE, Venezia, Toulouse, and Copenhagen as well as Piero Gottardi, Karel Mertens, Marco Ottaviani, Markus Poschke, Karl Schlag, and Sanne Zwart for useful comments.