A sequential dynamic pricing model and its applications

A sequential dynamic pricing model and its applications

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Article ID: iaor20052066
Country: United States
Volume: 51
Issue: 4
Start Page Number: 501
End Page Number: 521
Publication Date: Jun 2004
Journal: Naval Research Logistics
Authors:
Keywords: economics, programming: dynamic
Abstract:

Consider a sequential dynamic pricing model where a seller sells a given stock to a random number of customers. Arriving one at a time, each customer will purchase one item if the product price is lower than her personal reservation price. The seller's objective is to post a potentially different price for each customer in order to maximize the expected total revenue. We formulate the seller's problem as a stochastic dynamic programming model, and develop an algorithm to compute the optimal policy. We then apply the results from this sequential dynamic pricing model to the case where customers arrive according to a continuous-time point process. In particular, we derive tight bounds for the optimal expected revenue, and develop an asymptotically optimal heuristic policy.

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