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Continuous learning methods in two-buyer pricing problem

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  • Kimmo Berg

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  • Harri Ehtamo

Abstract

This paper presents continuous learning methods in a monopoly pricing problem where the firm has uncertainty about the buyers’ preferences. The firm designs a menu of quality-price bundles and adjusts them using only local information about the buyers’ preferences. The learning methods define different paths, and we compare how much profit the firm makes on these paths, how long it takes to learn the optimal tariff, and how the buyers’ utilities change during the learning period. We also present a way to compute the optimal path in terms of discounted profit with dynamic programming and complete information. Numerical examples show that the optimal path may involve jumps where the buyer types switch from one bundle to another, and this is a property which is difficult to include in the learning methods. The learning methods have, however, the benefit that they can be generalized to pricing problems with many buyers types and qualities. Copyright Springer-Verlag 2012

Suggested Citation

  • Kimmo Berg & Harri Ehtamo, 2012. "Continuous learning methods in two-buyer pricing problem," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 75(3), pages 287-304, June.
  • Handle: RePEc:spr:mathme:v:75:y:2012:i:3:p:287-304
    DOI: 10.1007/s00186-012-0385-6
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    References listed on IDEAS

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    1. Ehtamo, Harri & Berg, Kimmo & Kitti, Mitri, 2010. "An adjustment scheme for nonlinear pricing problem with two buyers," European Journal of Operational Research, Elsevier, vol. 201(1), pages 259-266, February.
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    10. Lin, Kyle Y., 2006. "Dynamic pricing with real-time demand learning," European Journal of Operational Research, Elsevier, vol. 174(1), pages 522-538, October.
    11. Aloisio Pessoa_de_Araujo & Humberto L. Moreira, 2000. "Adverse Selection Problems without The Single Crossing Property," Econometric Society World Congress 2000 Contributed Papers 1874, Econometric Society.
    12. Christopher Brooks & Robert Gazzale & Rajarshi Das & Jeffrey Kephart & Jeffrey MacKie-Mason & Edmund Durfee, 2002. "Model Selection in an Information Economy : Choosing what to Learn," Department of Economics Working Papers 2002-01, Department of Economics, Williams College.
    13. Wedad Elmaghraby & P{i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
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    Cited by:

    1. Kimmo Berg, 2013. "Complexity of solution structures in nonlinear pricing," Annals of Operations Research, Springer, vol. 206(1), pages 23-37, July.

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