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A simulation‐based algorithm for optimal pricing policy under demand uncertainty
Author(s) -
Chakravarty Saswata,
Padakandla Sindhu,
Bhatnagar Shalabh
Publication year - 2014
Publication title -
international transactions in operational research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.032
H-Index - 52
eISSN - 1475-3995
pISSN - 0969-6016
DOI - 10.1111/itor.12064
Subject(s) - parameterized complexity , computer science , estimator , dynamic pricing , mathematical optimization , product (mathematics) , time horizon , extension (predicate logic) , stochastic differential equation , algorithm , mathematics , economics , statistics , geometry , programming language , microeconomics
We propose a simulation‐based algorithm for computing the optimal pricing policy for a product under uncertain demand dynamics. We consider a parameterized stochastic differential equation (SDE) model for the uncertain demand dynamics of the product over the planning horizon. In particular, we consider a dynamic model that is an extension of the Bass model. The performance of our algorithm is compared to that of a myopic pricing policy and is shown to give better results. Two significant advantages with our algorithm are as follows: (a) it does not require information on the system model parameters if the SDE system state is known via either a simulation device or real data, and (b) as it works efficiently even for high‐dimensional parameters, it uses the efficient smoothed functional gradient estimator.