Impact of Artificial Intelligence on dynamic pricing

1.Introduction
To get ahead in an immensely competitive world, disruption is key to making a successful
business. Artificial Intelligence has emerged as a cornerstone in assisting businesses uncover
new possibilities and change the market as we know it (Enholm et al., 2021). Researchers across
the business world have been studying the impacts that artificial intelligence presents to firms,
stakeholders and consumers in an increasingly automated and interwebbed business landscape
(Loureiro et al., 2020). Dynamic pricing is understood as price changes that are affected by
variations in any of the four key underlying market demand drivers, those being
1. People (individual consumers or entire segments)
2. Changes to product
3. Flow of time
4. Locations
Dynamic pricing started as a way to fetch more income from a vending machine. Douglas
Ivester, the CEO of Coca cola, in 1999 was trying to figure out a way to maximize revenue.
What he then proceeded to do was change the prices of the popular drink inside vending
machines according to the outside temperature (more expensive on hot days, less on cool days). Citation?

The concept of dynamic pricing has grown along with technology from earlier pricing strategies.
For revenue maximization and personalized shopping experiences, firms across the world today
use data analytics and algorithmic functions to adapt prices (Kopalle et al., 2023). It is also a
popular strategy among traders who use dynamic pricing algorithms, that automatically updates
prices according to competitor offers, these price updates happen rather frequently as it is a real
time function (Kastius & Schlosser, 2021). Various marketing and psychology researchers have
given a lot of attention to the RPE (reference price effect) which is the change in demand that
firms experience when the customers make a judgment of the value that the product offers as
opposed to some other reference point or price (Chen et al., 2019). This research aims to explore
how artificial intelligence is used in algorithmic pricing strategies and how this affects
consumers behavior. Good.
2. Research Problem & Objectives

Research Question:

How do consumers respond to AI-driven dynamic pricing?

Research Objectives:
a. Explore how AI is used in forming dynamic pricing strategies.
b. Examine how AI driven dynamic pricing affects consumer behavior.
c. Investigate the potential correlation between algorithmic pricing strategies and collusive
behavior in markets. Well drafted question and objectives. Well done! :)

3. A Brief Literature Review

Every transaction, interaction, click leaves behind plenty of data. Harnessing this data provides
organizations with a clear advantage over their competitors in terms of analyzing customer
behavior, market trends and competitor analysis(Redefining B2C Pricing Strategy: Navigating
the Shift from Intuition to Data-Driven Decisions, 2023). AI technologies have completely
changed how organizations analyze data, improve upon their knowledge and make smart
decisions (Ma & Sun, 2020). AI has sparked an unusual amount of growth and innovation,
completely changing how organizations interact with consumers and improve customer
experience. Accenture’s research found that 91% of consumers prefer shopping with brands that
provide personalized offers and recommendations (Fintelics, n.d.). If the year is missing, just look when the
article was written and add it here. Don't
leave it as n.d.

One way that AI can be used in order to create a better shopping experience and maximize
revenue is by machine learning algorithms driven dynamic and personalized pricing. AI has the
ability to provide personalized pricing which can help adjusting prices on the basis of real world
demand, customer data and individual preferences. This technology ensures that consumer
expectations are met and also significantly drives loyalty and increases engagement (Blogger,
2023).

AI can be leveraged for the effective use of dynamic pricing through the use of machine learning
algorithms that validate predictive analytics. This allows businesses to not only forecast future
revenue and mitigate risks, but it also allows for personalized marketing by comprehending
customer behavior and improving customer experience (Ma & Sun, 2020). Algorithmic pricing
strategies are essential for businesses to employ price discrimination. Price discrimination is a
strategy used by businesses that allows them to charge different prices to different consumers,
based on preferences and characteristics, in order to maximize profits. Although the use of this
strategy stimulates brand loyalty, it raises moral concerns regarding fair and transparent pricing
(Ma & Sun, 2020). Algorithmic decision analysis, while essential in the current dynamics, plays
key roles in implementing price discrimination strategies. However, you run the risk of being
unjust and illegal when algorithms are trained on the basis of biased data, leading to concerns
from academics and rule makers about its discriminatory nature (Zarkesh & Hameed, 2023).

Another concern raised with AI-driven pricing strategies is the perception of fairness and
transparency, customer satisfaction is highly dependent on how they perceive the prices to be.
Customer loyalty, which has long been a key determinant of long term business success is
influenced by a variety of factors including perceived equity in pricing.

There is also potential for a correlation between algorithmic pricing and collusion, a topic that is
gaining interest across various fields including economics, law, and computer science. While
various theories give conflicting views on whether algorithmic competition leads to collusive
outcomes, any substantial research on this topic is scarce. Legal experts have concerns over the
possibility of algorithmic pricing fostering collusive behavior, highlighting its problems for
competition policy (Assad et al., 2020).

Although, AI driven price differentiation has potential to positively impact customer loyalty and
satisfaction. It also requires consideration towards ethics and having a transparent
strategy.(Zarkesh & Hameed, 2023)

State the research gap identified as a closure for the literature review.
4. Theoretical Framework

Customer behavior is a fundamental variable that impacts the success of a business. In recent

years, many companies have increased their focus on improving customer loyalty and

satisfaction in order to stimulate positive customer behavior. There are several factors that affect

customer behavior. Organizations have implemented many strategies but the strategy that has

recently grown to popularity is AI driven dynamic pricing, which comes with its own set of

challenges.

Algorithmic pricing strategies help businesses adjust their prices based on factors such as time,

customer preferences etc. Algorithmic pricing strategies help organizations alter their prices to

maximize revenue and possibly promote positive consumer behavior. Some of the strategies AI

helps bring in also have a risk of adversely impacting consumer trust and poses ethical problems.

Such as price discrimination that has moral and ethical considerations. The use of price

discrimination as a strategy for dynamic pricing may result in the unfair treatment of some

customers which would damage customer perceptions and the overall trust in fair pricing.

Therefore, customer satisfaction greatly depends on how fair and transparent the pricing

strategies used by the companies seem to be, this also has an effect on brand loyalty.

Scholars from various fields have also raised concerns over the possibility of collusion within

competing organizations. These concerns have a damaging effect on customer perception and

could possibly ruin brand image. Increasing use of algorithmic prices only increases the risk of

collusion as machine learning algorithms use competitive pricing as one of the measures. So

while this pricing strategy has great benefits in terms of revenue maximization, it also has some

downsides that necessitate consideration and need to be taken care of in order to make sure that
collusion is no longer a possibility. Downsides include doubt over the transparency and fairness

in pricing Good. Where is the model? Schematic is missing.

5. Hypotheses

a) Customer satisfaction is heavily influenced by perceptions of pricing fairness,

transparency, and alignment with expectations, ultimately affecting brand loyalty.

b) Increased utilization of algorithmic pricing will lead to a higher likelihood of collusive

behavior among competing firms. You can even indicate this as null and alt. Should you decide it
to be that way.

6. Methodology

The research methodology utilized throughout this research proposal include conceptual

modeling and literature reviews. Thorough research will be orchestrated to gain clarification. The

presented information would be accumulated through 2 primary sources of data: interviews and

survey questionnaires. Secondary datasets will be congregated by a brief literature review along

with an in-depth analysis of A grade academic journals.

Profile of the respondent: Some key aspects to look out for while deriving the respondent

include age, gender, profession, industry, etc. This profile is crucial in understanding the nature

of the respondent, whilst ensuring that the profile encompasses a vast variety of segments. Just give
guestimates of the
Sample selection and size: The ideal scenario would include 12 interviews, and 500 respondents here.

questionnaire responses. IS this right? 500? Is this calculated as per the variables you have?

Data Collection Method: The variables of the research would be influenced through a vast 1 question per
variable so how
questionnaire that would be shared online to the participants of the survey. Datasets of many question
will be there in
information would also be accumulated through peer-reviewed articles, journals, and several your
questionnaire?
interviews. Mention that.

Questionnaire: The questions would be in regard with the discussed variables. All questions

will be open-ended, and would be answered on a scale of - Strongly Satisfied to Strongly

implemented in this process.

References

Assad, S., Clark, R., Ershov, D., & Xu, L. (2020). Algorithmic Pricing and Competition:

Empirical Evidence from the German Retail Gasoline Market. SSRN Electronic Journal.

https://doi.org/10.2139/ssrn.3682021

Chen, K., Zha, Y., Alwan, L. C., & Zhang, L. (2019). Dynamic pricing in the presence of

reference price effect and consumer strategic behaviour. International Journal of

Production Research, 58(2), 546–561. https://doi.org/10.1080/00207543.2019.1598592

Enholm, I. M., Papagiannidis, E., Mikalef, P., & Krogstie, J. (2021). Artificial Intelligence and

Business Value: a Literature Review. Information Systems Frontiers, 24(5), 1709–1734.

Springer.

Fintelics. (n.d.). AI in E-commerce: Boosting Sales through Personalized Recommendations and

Dynamic Pricing. Www.youtube.com. Retrieved February 13, 2024, from

https://www.youtube.com/watch?v=_d_nxz7wMi8
Kastius, A., & Schlosser, R. (2021). Dynamic pricing under competition using reinforcement

learning. Journal of Revenue and Pricing Management.

https://doi.org/10.1057/s41272-021-00285-3

Kopalle, P. K., Pauwels, K., Akella, L. Y., & Gangwar, M. (2023). Dynamic pricing: Definition,

implications for managers, and future research directions. Journal of Retailing, 99(4).

https://doi.org/10.1016/j.jretai.2023.11.003

Loureiro, S. M. C., Guerreiro, J., & Tussyadiah, I. (2020). Artificial Intelligence in business:

State of the Art and Future Research Agenda. Journal of Business Research, 129(1).

Ma, L., & Sun, B. (2020). Machine learning and AI in marketing – Connecting computing power

to human insights. International Journal of Research in Marketing, 37(3).

Redefining B2C Pricing Strategy: Navigating the Shift from Intuition to Data-Driven Decisions.

(2023, August 9). Jennings Executive Search.

https://jenningsexec.com/redefining-b2c-pricing-strategy-shift-from-intuition-to-data/

Zarkesh, B., & Hameed, I. (2023). Exploring the Impact of AI-Driven Pricing on Customer

Loyalty and Churn Rates in the Banking Industry.

https://ntnuopen.ntnu.no/ntnu-xmlui/bitstream/handle/11250/3080341/no.ntnu%3Ainsper

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