A simulation-based algorithm for optimal pricing policy under demand uncertainty

A simulation-based algorithm for optimal pricing policy under demand uncertainty

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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: , ,
Keywords: demand, simulation: applications
Abstract:

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.

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