Always low prices. Always?

walmartIt is a beginning of teaching semester and this blog inevitably gets more active. One article caught my attention recently. It is related to my research, and as one can probably guess from the title, it’s about retail pricing. Particularly, Walmart and its everyday-low-prices (EDLP) policy. It turns out that Walmart’s (at least online) everyday-low-price policy becomes “everyday-adjusted-price” policy.

The article suggests that the reason for the Walmart’s pricing policy change is competition from Amazon.com. Citing the e-commerce data analytics firm 360pi, it reports that on 15% of the products, Walmart changed prices daily (very close to that percentage at Amazon.com). Furthermore, Walmart prices closely track those at Amazon.com generally staying within 5%.

Competition with Amazon.com may be one of the reason, but to me it seems it is not the only nor the main one. Retailers are in the business of converting goods into revenue, and dynamic pricing simply generates more revenue. The revenue lift is of course conditional on the fact that consumers keep buying at regular (high prices) and not just patiently waiting for bargains. This is where understanding how consumers decide whether to wait or buy becomes important.

Two recent research papers speak directly to this point. One, by my colleagues, shows that human behavior provides rationale for markdown or dynamic pricing over EDLP pricing.  The other, by me and co-authors, shows that markdowns can be set even larger than the current methods prescribe, leading to substantial revenue gains. From that perspective, Walmart is doing exactly the right thing by adopting the dynamic price policy.