Sponsored search advertising and dynamic pricing for perishable products under inventory-linked customer willingness to pay

Abstract

Several online retailers provide inventory availability information on their websites in addition to leveraging sponsored search advertising to drive customer traffic to their retail websites. The increased ability of users to interact over the internet encourages retailers to shift to sponsored search advertising. In this paper, we design a decision support model to provide strategic bid and pricing decisions to a retailer selling a perishable product over a short horizon using sponsored search advertising to attract customers to his website. The retailer complements sponsored search bidding with dynamic pricing in a multi-period stochastic dynamic programming framework. Our analyses show that it is optimal for the retailer to invest heavily in bidding at low inventory levels, whereas at high levels of inventory he should use price promotions to enhance profits. We also find that the optimal bid and price increase with the increase in mean and variability of the customer's reservation price.