A Promotion Model by Randomizing Price in Electronic Commerce

In this paper, we present a framework to study promotion strategy for an on-line retailer by incorporating some new features in electronic commerce. For example, information asymmetry about products´ prices doesn´t exist across Internet users, due to easy access to price information and very low searching cost. Consumer´s reneging behavior is also considered. Online consumers may wait for up to a certain period of time to get their interested products at a lower price. Under e-commerce environment, online retailers can offer promotion more frequently and intelligently. Specifically, we model online retailer´s price variation as a Markov process and derive the optimal price and profit for the retailer. Comparative statistics and numerical examples are provided to illustrate the impact of consumer´s reservation price and promotion pattern on retailer´s profit.