How Do Price Promotions Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba

37 Pages Posted: 1 Sep 2017 Last revised: 24 Apr 2018

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School

Hengchen Dai

University of California, Los Angeles (UCLA) - Anderson School of Management

Lingxiu Dong

Washington University in St. Louis - John M. Olin Business School

Fangfang Qi

Alibaba Group

Nannan Zhang

Alibaba Group

Xiaofei Liu

Alibaba Group

Zhongyi Liu

Alibaba Group

Jiang Yang

Alibaba Group

Date Written: August 30, 2017

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.

Keywords: dynamic pricing, price promotions, platform operations, retail operations, field experiment, empirical OM

Suggested Citation

Zhang, Dennis and Dai, Hengchen and Dong, Lingxiu and Qi, Fangfang and Zhang, Nannan and Liu, Xiaofei and Liu, Zhongyi and Yang, Jiang, How Do Price Promotions Affect Customer Behavior on Retailing Platforms? Evidence from a Large Randomized Experiment on Alibaba (August 30, 2017). Available at SSRN: https://ssrn.com/abstract=3029707 or http://dx.doi.org/10.2139/ssrn.3029707

Dennis Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Hengchen Dai

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Lingxiu Dong

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Fangfang Qi

Alibaba Group ( email )

Nannan Zhang

Alibaba Group ( email )

Xiaofei Liu

Alibaba Group ( email )

Zhongyi Liu

Alibaba Group ( email )

Jiang Yang

Alibaba Group ( email )

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