How Does Dynamic Pricing Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba

Abstract

Dynamic pricing through price promotions has been widely employed by online retailers. We study how a promotion strategy -- offering customers a discount for products in their shopping cart -- affects customer behavior in the short and long term on a retailing platform. We conducted a randomized field experiment involving more than 100 million customers and 11,000 retailers with Alibaba Group, the world's largest retailing platform. We randomly assigned eligible customers to either receive promotions for products in their shopping cart (treatment group) or not (control group). In the short term, our promotion program doubled the sales of promoted products. In the long term, we causally document unintended consequences of this promotion program during the month following our treatment period. On the positive side, it boosted customer engagement, increasing the daily number of products customers viewed and their purchase incidence on the platform. On the negative side, it intensified strategic customer behaviors in the post-treatment period in two ways, by (1) increasing the proportion of products that customers added to the shopping cart upon viewing them, possibly due to their anticipation of future shopping-cart promotions and (2) decreasing the price customers subsequently paid for a product, possibly due to their strategic search for lower prices. Importantly, these long-term effects of price promotions on consumer engagement and strategic behavior spilled over to sellers that did not previously offer promotions to customers. Heterogeneous treatment effects across promotion, seller, and consumer characteristics are examined. This research documents the causal effects of dynamic pricing through price promotions on consumer behavior on a retailing platform, which have important implications for platforms and retailers.