Pricing and Positioning of Horizontally Differentiated Products with Incomplete Demand Information

Arnoud V. den Boer (), Boxiao Chen () and Yining Wang ()
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Arnoud V. den Boer: Korteweg-de Vries Institute for Mathematics, University of Amsterdam, 1090 GE Amsterdam, Netherlands
Boxiao Chen: College of Business Administration, University of Illinois Chicago, Chicago, Illinois 60607
Yining Wang: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080

Operations Research, 2024, vol. 72, issue 6, 2446-2466

Abstract: We consider the problem of determining the optimal prices and product configurations of horizontally differentiated products when customers purchase according to a locational (Hotelling) choice model and where the problem parameters are initially unknown to the decision maker. Both for the single-product and multiple-product setting, we propose a data-driven algorithm that learns the optimal prices and product configurations from accumulating sales data, and we show that their regret—the expected cumulative loss caused by not using optimal decisions—after T time periods is O ( T 1 / 2 + o ( 1 ) ) . We accompany this result by showing that, even in the single-product setting, the regret of any algorithm is bounded from below by a constant time T 1 / 2 , implying that our algorithms are asymptotically near optimal. In an extension, we show how our algorithm can be adapted for the case of fixed locations. A numerical study that compares our algorithms with three benchmarks shows that our algorithm is also competitive on a finite time horizon.

Keywords: Market Analytics and Revenue Management; horizontal product differentiation; Hotelling model; dynamic pricing; product positioning; incomplete information (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:72:y:2024:i:6:p:2446-2466

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