Joint Dynamic Pricing and Order Fulfillment for E-Commerce Retailers

Abstract

We consider an e-commerce retailer (e-tailer) who sells a catalog of products to customers from different regions during a finite selling season and fulfills orders through multiple fulfillment centers. The e-tailer faces a Joint Pricing and Fulfillment (JPF) problem: At the beginning of each period, she needs to jointly decide the price for each product and how to fulfill an incoming order. The objective is to maximize the total expected profits defined as total expected revenues minus total expected shipping costs (all other costs are fixed in this problem). The exact optimal policy for JPF is difficult to solve; so, we propose two heuristics that have provably good performance compared to reasonable benchmarks. Our first heuristic directly uses the solution of a deterministic approximation of JPF as its control parameters whereas our second heuristic improves the first heuristic by adaptively adjusting the original control parameters at the beginning of every period. An important feature of the second heuristic is that it decouples the pricing and fulfillment decisions, making it easy to implement. We show theoretically and numerically that the second heuristic significantly outperforms the first heuristic and is very close to a benchmark that jointly re-optimizes the full deterministic problem at every period.

Keywords: dynamic pricing, order fulfillment, e-commerce

JEL Classification: C60