TY - JOUR
T1 - Dynamic pricing of multiple home delivery options
AU - Asdemir, Kursad
AU - Jacob, Varghese S.
AU - Krishnan, Ramayya
N1 - Funding Information:
Kursad Asdemir’s research is partly supported by the Winspear Senior Faculty Fellowship at the School of Business, University of Alberta. We acknowledge extensive and helpful comments by three anonymous referees that improved this paper significantly.
PY - 2009/7/1
Y1 - 2009/7/1
N2 - Online grocers accept delivery bookings and have to deliver groceries to consumers' residences. Grocery stores operate on very thin margins. Therefore, a critical question that an online grocery store needs to address is the cost of home delivery operations. In this paper, we develop a Markov decision process-based pricing model that recognizes the need to balance utilization of delivery capacity by the grocer and the need to have the goods delivered at the most convenient time for the customer. The model dynamically adjusts delivery prices as customers arrive and make choices. The optimal prices have the following properties. First, the optimal prices are such that the online grocer gains the same expected payoff in the remaining booking horizon, regardless of the delivery option independently chosen by a consumer. Second, with unit order sizes, delivery prices can increase due to dynamic substitution effects as there is less time left in the booking horizon.
AB - Online grocers accept delivery bookings and have to deliver groceries to consumers' residences. Grocery stores operate on very thin margins. Therefore, a critical question that an online grocery store needs to address is the cost of home delivery operations. In this paper, we develop a Markov decision process-based pricing model that recognizes the need to balance utilization of delivery capacity by the grocer and the need to have the goods delivered at the most convenient time for the customer. The model dynamically adjusts delivery prices as customers arrive and make choices. The optimal prices have the following properties. First, the optimal prices are such that the online grocer gains the same expected payoff in the remaining booking horizon, regardless of the delivery option independently chosen by a consumer. Second, with unit order sizes, delivery prices can increase due to dynamic substitution effects as there is less time left in the booking horizon.
KW - Dynamic programming
KW - E-commerce
KW - Pricing
KW - Revenue management
UR - http://www.scopus.com/inward/record.url?scp=56549124436&partnerID=8YFLogxK
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U2 - 10.1016/j.ejor.2008.03.005
DO - 10.1016/j.ejor.2008.03.005
M3 - Article
AN - SCOPUS:56549124436
SN - 0377-2217
VL - 196
SP - 246
EP - 257
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 1
ER -