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The unintended consequences of tinkering with online prices | Phys.org

When your online retail platform clears billions of transactions a year, what’s the harm in testing different prices for the same products on a relative handful of your customers? You might find a way to maximize revenue by increasing sales volume on your lower-priced products, right? Or, you might lock down sales on a product that your consumers were on the fence about.

That’s the theory behind “dynamic pricing,” a practice in vogue among online retailers as they attempt to better manage revenue and take advantage of massive amounts of data they’re collecting about their customers.

But a new paper by a team of researchers—including two faculty from Olin Business School at Washington University in St. Louis—shows the practice of dynamic pricing can generate unintended consequences by changing the behavior of customers.

“Retailers didn’t realize that offering different prices to different customers may backfire in the long run,” said Dennis Zhang, assistant professor of operations and manufacturing management and one of the paper’s authors.

In the paper titled “How Do Price Promotions Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba,” accepted for publication forthcoming in Management Science, the researchers focused on a promotional tool Chinese online retailer Alibaba Group uses to target customers who leave products to languish in their shopping carts.

Between March 12 and April 11, 2016, Alibaba conducted an experiment on more than 100 million Alibaba customers who shopped at 11,000 retailers. They targeted a random set of customers who had products untouched in their shopping carts for more than 24 hours with special price promotions. Other customers who met the same criteria received no special price promotions. The researchers collaborated with Alibaba to analyze this experiment.

via The unintended consequences of tinkering with online prices.