A continuous approximation method for dynamic pricing problem under costly price modifications

Abdullah Dasci and Rongbing Huang

Omega, 2017, vol. 72, issue C, 38-49

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.

Keywords: Revenue management; Dynamic pricing; Continuous approximation (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.omega.2016.11.002

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