Dynamic pricing: ecommerce - oriented price setting algorithm

Pricing in electronic commerce is based on bargaining. Pricing models that can fast change prices during transaction on the consequence of the buyer´s needs is beneficial to electronic commerce. Demand sensitive model is one of the pricing models that can be used for fast changes of prices in electronic commerce. Price setting algorithm for demand sensitive model helps sellers to get decision variables, price per unit that maximizes profit for the quantity ordered by buyers. In this paper we analyze the price setting algorithms of demand sensitive model. We use a simple example to explain how the changes of price elasticity of demand changes price per unit, gross margin and quantity demanded. Also we show how the changes of quantity demanded changes the unit price and marginal cost. The investigation shows that an increase in demand ordered decreases price per unit of a good, at the same time increasing profit margin to seller and decreasing production cost. The seller extracts some of the buyer´s surplus value as profits with residual surplus remaining with the buyer over and above the actual price paid. Buyers do not pay the same amount of total price for the good ordered within the same group of order, because of the difference in the net browsing cost.