Selling in channels with uncertain price

Abstract

In this article, we analyze the problem of selling through channels where the sales price and hence revenue is uncertain. Examples of such channels include real estate listings, traditional and online auctions, name-your-own-price channels and price guarantees. More specifically, we consider a seller, with a fixed inventory, who has to decide when to make items available to the market. We assume that there is a holding or depreciation cost associated with the items, which means that the seller would like to make items available for sale as soon as possible. On the other hand, we also assume that the expected selling price is decreasing in the number of items made available to the market. That is, there is a price cannibalization effect among the items made available at the same time, resulting in an incentive to make items available sequentially over time. We formulate the problem as a discrete time Markov Decision Problem and consider two cases: guaranteed successful sales and possibly unsuccessful sales. The reason for considering the two cases is that they require different analyses and give rise to different results. The article focuses on the case when the seller only has two items, which has sufficient complexity to raise interesting insights and challenging questions.