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A continuous approximation method for dynamic pricing problem under costly price modifications

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  • Dasci, Abdullah
  • Huang, Rongbing

Abstract

This paper presents a heuristic method to solve a dynamic pricing problem under costly price modifications. This is an extremely difficult nonlinear problem that has been solved only for a few special instances. Here we provide a new approach that involves an approximate reformulation of the problem, which can subsequently be solved in closed-form using elementary calculus techniques. Numerical results show that the approach is quite accurate; approximating the optimal revenue with errors usually much less than 1%. Moreover, the accuracy rapidly improves as the optimal number of price changes increases, which are precisely the cases conventional approaches would fail.

Suggested Citation

  • Dasci, Abdullah & Huang, Rongbing, 2017. "A continuous approximation method for dynamic pricing problem under costly price modifications," Omega, Elsevier, vol. 72(C), pages 38-49.
    • Handle: RePEc:eee:jomega:v:72:y:2017:i:c:p:38-49
    DOI: 10.1016/j.omega.2016.11.002
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