Exploring Price Elasticity to Optimize Posted Prices in e-Commerce
Price dispersion in the Internet has attracted attention from practitioners and academics alike, since it enables companies to adjust prices to a level appropriate to their strategy. This paper demonstrates how Internet retailers can optimize short-term profitability by determining the price elasticity of demand based on empirical price tests. For this purpose visitors of an Internet retailer are divided into subgroups of approximately same size and identical characteristics. Using A-B tests different prices are shown to each subgroup and the conversion rate as a function of price is calculated. We describe the organizational requirements, the technical approach, and the statistical analysis applied to determine the price optimizing the per-order profit. A field study carried out with a large Internet retailer is presented and shows that the company was able to optimize the analyzed price component and thus increase the contribution margin per visitor by about 7%. We conclude that the discussed method could be applied to answer further research questions such as the temporal behavior of demand curves.
KeywordsPrice Elasticity Demand Curve Price Discrimination Contribution Margin Price Dispersion
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