A continuous approximation method for dynamic pricing problem under costly price modifications |
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| Institution: | 1. School of Management, Sabanci University, Orta Mahalle, Tuzla, Istanbul 34956, Turkey;2. School of Administrative Studies, York University, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3;1. School of Industrial Engineering, Eindhoven University of Technology, P.O. Box 513, 5600MB Eindhoven, The Netherlands;2. Department of Industrial Engineering, TED University, 06420 Ankara, Turkey;1. Center of Operations Research, University Miguel Hernandez, Elche, 03202 Alicante, Spain;2. Institute of Applied Mathematics, Department of Logistics, Wroclaw University of Economics, Poland;1. NASA Langley Research Center;2. Analytical Mechanics Associates, Inc.;3. Northrop Grumman, MS 492, Hampton, VA 23681, USA;4. University of Illinois at Urbana-Champaign, Urbana, IL 61801, USA;1. Oil Company RussNeft, 69, Pyatnitskaya st., Moscow, Russia;2. National Research University Higher School of Economics, Russian Federation;3. Lomonosov Moscow State University, Russia;4. National Research Nuclear University “MEPhI” (Moscow Engineering Physics Institute), 31, Kashirskoe Highway, Moscow, Russia;5. International Centre for Nuclear Safety, Minatom of Russia, 2/8, Krasnoselskaya M. Street, Moscow, Russia;6. Corporate Finance Department, Summa Group, Russia |
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| Abstract: | This paper presents a heuristic method to solve a dynamic pricing problem under costly price modifications. This is an extremely difficult nonlinear problem that has been solved only for a few special instances. Here we provide a new approach that involves an approximate reformulation of the problem, which can subsequently be solved in closed-form using elementary calculus techniques. Numerical results show that the approach is quite accurate; approximating the optimal revenue with errors usually much less than 1%. Moreover, the accuracy rapidly improves as the optimal number of price changes increases, which are precisely the cases conventional approaches would fail. |
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| Keywords: | Revenue management Dynamic pricing Continuous approximation |
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