Dynamic pricing of multiple home delivery options

Kursad Asdemir, Varghese S. Jacob, Ramayya Krishnan

Research output: Contribution to journalArticlepeer-review

52 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)246-257
Number of pages12
JournalEuropean Journal of Operational Research
Volume196
Issue number1
DOIs
Publication statusPublished - Jul 1 2009
Externally publishedYes

Keywords

  • Dynamic programming
  • E-commerce
  • Pricing
  • Revenue management

ASJC Scopus subject areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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