Revenue management and seller pricing decisions in retail industry: An agent-based model

Abstract

Retailers commonly offer discounts to encourage consumers to purchase more products thereby increasing retailers’ revenues. This article focuses on modeling the seller pricing decisions by using agent-based approach when the price, as a tool of revenue management, decreases. Considering the seller as an agent who uses price changes to maximize its total revenues, the objective of this research is to find the proper seller’s decision about the rate of discount on products in 3 different scenarios. In the first scenario, all products’ price elasticity of demand are the same and the products have relatively elastic demand. In the second scenario, all goods have the same price elasticity of demand and have relatively inelastic demands. The third scenario presents a combination of the first and the second scenarios in which the price elasticity of demand of products are different and goods with elastic and inelastic demand are placed next to each other. Also, all goods in each scenario are substitutes. In the first scenario, reducing the price causes the downward trend in rate of profit even though the discount could increase the revenue. In the second scenario, the agent behaves differently which offering the discount does not increase the revenue. In the third scenario, the products’ discount increases the revenue with a slope less than the first scenario. Also, the discount for all products doesn’t cause income growth. Therefore, some goods without any discount remain in shelf. Consequently, the proposed model in this research shows the proper rate of discount on each product in different product layouts.