Computers & Industrial Engineering 177 (2023) 109086 Available online 10 February 2023 0360-8352/© 2023 Published by Elsevier Ltd. A solution approach for sponsored search advertising and dynamic pricing for a perishable product and an online retailer with budget constraint Shabnam Salehi , S. Hamid Mirmohammadi * Department of Industrial and Systems Engineering, Isfahan University of Technology, Isfahan 84156-83111, Iran A R T I C L E INFO Keywords: Pricing Sponsored search advertising Stochastic dynamic programming Online retailing Budget constraint ABSTRACT This paper presents an algorithm based on stochastic dynamic programming framework for an online retailer who is to maximize his revenue by dual use of sponsored search advertising and dynamic pricing for a fxed inventory of a perishable product over a fnite horizon. The available budget for advertising is limited over the planning horizon. As there is an interaction between bidding and pricing decisions, we provide an integrated advertising and pricing solution approach. First, we prove some properties of optimal policy. Second, according to the properties, we develop an effcient algorithm to solve large-scale instances. Finally, we conduct several numerical experiments to compare the proposed algorithm with an optimal approach which is presented in the form of a non-linear mathematical model. We observe that in all provided instances, the proposed algorithm reaches the optimal solution in far less time than the optimal approach. Additionally, we indicate the relationship between the run time of the presented approach and inventory level. In contrast with expectations, we fnd out that for a particular parameter setting, an increase in inventory level does not necessarily lead to an increase in the run time of the presented approach. 1. Introduction Applying proper advertising policy and allocating enough budget to advertising is one of the most substantial keys in various businesses. In recent years, due to the rapid growth of technology in the feld of the internet, online advertising has received much attention and is widely used. More online retailers continue to advertise on the internet far greater than any other offine media like newspapers, television, and etc. According to an industry survey conducted by PricewaterhouseCoopers, total internet advertising revenue only in the U.S reached $124.6 billion in 2019. This represented a 15.9 % growth over the $107.5 billion total for 2018 and it is projected to follow this increasing stream in next years. (PwC & IAB, 2019). Internet advertising has plenty of benefts compared to traditional methods of advertising. First of all, in digital marketing, advertisers can choose their target audience by different demographic characteristics like age, location, gender, education, device, and etc. This enables ad- vertisers to recognize potential customers and only show ads to them. In contrast, traditional advertising reaches broad audiences who may not be interested in ads. Additionally, in digital advertising, permanent analysis and performance measurement of marketing campaign is possible. Actually in this means of advertising, everything is quantif- able. In other words, advertisers can easily track and monitor the campaign at any time through diverse Key Performance Indicators (KPI) depending on their goals and targets. Digital advertising includes several methods but generally, two of the most well-known are search ads and display ads. Search advertising, which is also known as Sponsored Search Advertising (SSA), is about placing ads on a result page when users search particular keywords on a search engine. However, display ads mostly are graphical like banners or short videos and are paid slots which appear on websites or mobile apps. Based on survey carried out by PricewaterhouseCoopers, Search adverting owned the largest share of advertising revenue compare with banners, videos, and other ways of advertising (PwC & IAB, 2019). This statistic demonstrates the importance of using search advertising for an online retailer. Moreover, nowadays most consumers search on the internet to fnd their products or services and then decide to purchase. For instance, consider some travelers to have a junket. Obviously, the easiest way to fnd their trip essentials, like proper fight tickets, hotels and tours, is the internet. Hence, placing at the top of the result page is essential for online retailers such as hotel managers, airline tickets agents, travel agents and etc. in this case. For them, applying search * Corresponding author. E-mail addresses: salehi97@in.iut.ac.ir (S. Salehi), h_mirmohammadi@iut.ac.ir (S.H. Mirmohammadi). Contents lists available at ScienceDirect Computers & Industrial Engineering journal homepage: www.elsevier.com/locate/caie https://doi.org/10.1016/j.cie.2023.109086 Received 17 May 2022; Received in revised form 20 December 2022; Accepted 7 February 2023