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Minimizing online retailers’ revenue loss under a time-varying willingness-to-pay distribution

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  • Kazemi, Mohammad Sadegh
  • Fotopoulos, Stergios B.
  • Wang, Xinchang

Abstract

We study revenue management for an online retailer that offers a single product to customers with a time-varying willingness-to-pay (WTP) distribution. When the WTP distribution changes at an unknown time point (i.e., the change point), the original price quoted to customers may not be optimal. The retailer’s objective is to minimize his revenue loss by determining when to quote a new price to incoming customers and what the new price is. We formulate the problem as an optimization model, which is challenging to solve due to the presence of the unknown change point. To overcome this challenge, we first characterize the probability distribution of the estimated change point using maximum likelihood estimation. We then develop two pricing algorithms to solve the model by leveraging the characterized distribution. Lastly, through numerical studies, we illustrate the effectiveness of the proposed algorithms in identifying change points and recommending optimal post-change selling prices. The numerical results suggest that the proposed pricing algorithms significantly reduce the frequency of false change detection in the early stages of a selling season. The proposed pricing algorithms also outperform the benchmark pricing algorithm in reducing the retailer’s revenue loss.

Suggested Citation

  • Kazemi, Mohammad Sadegh & Fotopoulos, Stergios B. & Wang, Xinchang, 2023. "Minimizing online retailers’ revenue loss under a time-varying willingness-to-pay distribution," International Journal of Production Economics, Elsevier, vol. 257(C).
    • Handle: RePEc:eee:proeco:v:257:y:2023:i:c:s0925527322003498
    DOI: 10.1016/j.ijpe.2022.108767
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    References listed on IDEAS

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