Article ID: | iaor201524353 |
Volume: | 21 |
Issue: | 5 |
Start Page Number: | 737 |
End Page Number: | 760 |
Publication Date: | Sep 2014 |
Journal: | International Transactions in Operational Research |
Authors: | Bhatnagar Shalabh, Chakravarty Saswata, Padakandla Sindhu |
Keywords: | demand, simulation: applications |
We propose a simulation‐based algorithm for computing the optimal pricing policy for a product under uncertain demand dynamics. We consider a parameterized stochastic differential equation (SDE) model for the uncertain demand dynamics of the product over the planning horizon. In particular, we consider a dynamic model that is an extension of the Bass model. The performance of our algorithm is compared to that of a myopic pricing policy and is shown to give better results. Two significant advantages with our algorithm are as follows: (a) it does not require information on the system model parameters if the SDE system state is known via either a simulation device or real data, and (b) as it works efficiently even for high‐dimensional parameters, it uses the efficient smoothed functional gradient estimator.