Authors:
Rainer Schlosser
and
Martin Boissier
Affiliation:
Hasso Plattner Institute, Germany
Keyword(s):
Dynamic Pricing, Competition, Optimal Control, Response Strategies, Reaction Time, Price Cycles.
Related
Ontology
Subjects/Areas/Topics:
Artificial Intelligence
;
Business Analytics
;
Cardiovascular Technologies
;
Computing and Telecommunications in Cardiology
;
Data Engineering
;
Decision Support Systems
;
Decision Support Systems, Remote Data Analysis
;
Dynamic Programming
;
Game Theory
;
Health Engineering and Technology Applications
;
Knowledge Discovery and Information Retrieval
;
Knowledge-Based Systems
;
Methodologies and Technologies
;
Operational Research
;
Optimization
;
Symbolic Systems
Abstract:
Many markets are characterized by pricing competition. Typically, competitors are involved that adjust their prices in response to other competitors with different frequencies. We analyze stochastic dynamic pricing models under competition for the sale of durable goods. Given a competitor’s pricing strategy, we show how to derive optimal response strategies that take the anticipated competitor’s price adjustments into account. We study resulting price cycles and the associated expected long-term profits. We show that reaction frequencies have a major impact on a strategy’s performance. In order not to act predictable our model also allows to include randomized reaction times. Additionally, we study to which extent optimal response strategies of active competitors are affected by additional passive competitors that use constant prices. It turns out that optimized feedback strategies effectively avoid a decline in price. They help to gain profits, especially, when aggressive competitor
s are involved.
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