Modern e-commerce platforms pose both opportunities as well as hurdles for merchants. While merchants can observe markets at any point in time and automatically reprice their products, they also have to compete simultaneously with dozens of competitors.

Project Part I - Dynamic Pricing in Theory

Currently, retailers lack the possibility to test, develop, and evaluate their algorithms appropriately before releasing them into the real world. At the same time, it is challenging for researchers to investigate how pricing strategies interact with each other under heavy competition.

We built an open platform to simulate dynamic pricing competition allowing both practitioners and researchers to study the effects of automated repricing mechanisms competing with each other using market scenarios that mimic real-world marketplaces.

Results

Our platform enables analyses of how a strategy's performance is affected by customer behavior, price adjustment frequencies, the competitors' strategies, and the exit/entry of competitors.We compared traditional rule-based strategies with simple data-driven strategies. We find that data-driven merchants are superior to rule-based approaches as soon as a sufficiently large data set has been gathered.

Contact: Dr. Rainer Schlosser, Martin Boissier

Project Part II: Dynamic Pricing in Practice

Dynamic pricing competition on modern market platforms such as Amazon Marketplace or eBay is constantly growing. Effective automated repricing systems become increasingly important for practitioners. This, however, is a highly challenging task, because offers are multi-dimensional, demand information is limited, and competitors’ price reactions are not known.

The Amazon Challenge

In this project, we partner with a top 10 seller for used books on Amazon in Germany. Our partner has an inventory of over 100,000 distinct books (ISBN), each with multiple items. The challenge is to extract as much profit as possible from a given number of books (inventory level) in a reasonable amount of time.

The pricing strategy of our project partner is characterized by a rule-based system that has been developed over the past years by carefully adjusting rules to lessons learned from selling books on Amazon. Our goal was to develop an improved data-driven pricing strategy that is based on a theoretical model.

Data-Driven Repricing Model

To be able to set up a dynamic model in order to compute optimized prices, we estimated sales probabilities. We used a logistic regression approach to quantify how offer prices and specific market situations affect sales. We consider up to 10 offer dimensions (e.g., price, quality, ratings, feedback count, shipping time) per competitor for a particular market situation.

The data set that we used for the regression analysis contains both the requested market situations from Amazon as well as our seller's own data (offers, sales, and inventory). Our partner requests market situations for each offered book roughly every two hours (i.e., >20 M market situations per month which result in >140 M single competitor observations per month). We used thirty customized features, e.g., the price rank of our offer price within the competitors' prices. As a result, we were able to predict sales probabilities for any offer price and for any market situation. Using efficient solution techniques, we are able to compute optimized prices for current market situations.

The application of our dynamic pricing strategy works as follows: First, we observe current market situations for our products, then we calculate optimized prices according to the model, and finally adjust prices on the market platform. This procedure is repeated every two hours or in case of changing market situations. This way, our strategy is able to respond immediately to new situations as prices can be adjusted in milliseconds. Moreover, new incoming sales observations are used to further improve the strategy by estimating demand more accurately.

Results

Sales results over several weeks show that our strategy outperforms the established rule-based strategy of our experienced partner regarding profitability and speed of sales, resulting in a profit increase of more than 20%.

Contact: Dr. Rainer Schlosser, Martin Boissier