An agent based simulation model for retail price promotion strategies

Abstract

Retailers play a vital role in supply chains, particularly as an intermediary that brings together supply and demand. One of retailer’s strategic decisions that affects business profitability and supply chain as a whole is price promotion strategy. As retailers interact directly with the end costumers, a good promotion strategy has to incorporate the consumer behavior and preferences. Also, in optimizing its income, a retailer also needs to pay attention to their competitors who offer the same products or substitute goods to consumers. With regard to these conditions, it could be said that determining the best promotion strategy is a complex issue. The problem is difficult to understand through traditional mathematical approaches because of the interactions between retailers and consumers. This paper proposes an agent-based simulation model that can help analyzing the effectiveness of price promotion strategies. The model consists of two types of agents, which are retailers and consumers. It considers a dynamic consumer behavior driven by consumer preferences. Competition among retailers is also taken into account to the model. The final result of this study is an agent-based simulation model and analysis of price promotion strategies that are in line with the dynamic retail business environment.