A system for pricing the sales distribution from blockbusters to the long tail

• We examine the optimal discounting strategy along the sales distribution by accounting for both own and cross-sales of items and the reservation prices in the implementation of a pricing DSS.
• Any non-decreasing reservation price function along the sales rank distribution yields an optimal discounting strategy in which retailers price hit items lower than any non-hit item.
• A decreasing reservation price along the sales rank distribution coupled with a significant potential loss from loyal customers and a lack of cross-selling potential leads to hit items priced higher than non-hit items.
• However, a decreasing reservation price, a negligible potential loss from loyal customers and an environment conducive to cross-selling may still give way to hit items priced lower than non-hit items.
• We analyze data on books, MP3 songs, DVD movies and instant movies from Amazon.com and show that the same set of movies available both as instant videos and DVDs have opposing price paths along the sales rank distribution with increasing prices for DVDs and decreasing prices for streaming movies, as predicted by our model.

The long tail of retailing has been both a challenge and an opportunity for online retailers. This article provides guidelines for enhanced decision making strategies in pricing dependent on popularity, cross-sales quantity and reservation prices. Our model shows that if customer willingness to pay, or reservation price, is higher for less popular items in a category, a unique optimal price path exists which requires deep discounts on popular items. However, if the reservation price is lower for less popular items, the optimal price path is conditional on the profitability of cross-selling and the potential loss from the business of loyal customers. Analyzing data on books, songs and movies from Amazon.com, we provide empirical support for our model findings. An analysis of the same set of movies available both as instant videos and DVDs allow us control for unobserved product characteristics and yields contradictory price paths along the sales rank distribution with increasing prices for DVDs and decreasing prices for streaming movies, as predicted by our model.

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