A zero‐sum game approach for estimating cross‐elasticity price effects

A zero‐sum game approach for estimating cross‐elasticity price effects

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Article ID: iaor20124352
Volume: 11
Issue: 4
Start Page Number: 355
End Page Number: 363
Publication Date: Jul 2012
Journal: Journal of Revenue and Pricing Management
Authors: , ,
Keywords: Nash theory and methods, pricing, revenue management, elastic demand, zero sum game
Abstract:

Too often, product cannibalization effects are ignored or neglected by modelers trying to forecast demand, quantify price elasticities and ultimately optimize prices. The main reason is that, although well understood, cannibalization effects are hard to measure – and even harder to include in optimization algorithms. Given data‐scarcity issues with cross‐elasticities, the following analysis proposes an alternative solution to the computationally intensive, commonly infeasible problem of dealing with cannibalization effects in price optimization problems. Although the proposed solution approximates cannibalization effects, it can deliver a result in reasonable computational time frames by leveraging a theoretical game framework for calculating Nash equilibrium in zero‐sum games.

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