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"The Dynamic Pricing Problem from a Newsvendor's Perspective"

George E. Monahan, Nicholas C. Petruzzi, and Zhao Wen

 

First Author :

George E. Monahan
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

gmonahan@uiuc.edu

http://www.business.uiuc.edu/faculty/monahan.html


Second Author :

Nicholas C. Petruzzi
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

petruzzi@uiuc.edu

http://www.business.uiuc.edu/faculty/petruzzi.html


Third Author :

Zhao Wen
Mechanical and Industrial Engineering
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

wenzhao@uiuc.edu

 
 
Abstract :
 
The dynamic pricing problem concerns the determination of selling prices over time for a product whose demand is random and whose supply is fixed. We approach this problem in a novel way by formulating a dynamic optimization model in which the demand function is iso-elastic but the random demand process is quite general. Ultimately, what we need is a strong parallel between the dynamic pricing problem and dynamic inventory models. This parallel leads to a reinterpretation of the dynamic pricing problem as a price-setting newsvendor problem with recourse, which is useful not only because it yields insights into the optimal solution, but also because it leads to additional insights into how pricing recourse affects the actions and profits of a price-setting newsvendor. We make contributions in three areas: First, we develop structural properties that define an optimal pricing strategy over a finite horizon and investigate how that policy impacts a newsvendor’s optimal procurement policy and optimal expected profi.t. Second, we establish a practical and efficient algorithm for computing the optimal prices. Third, we examine how market parameters affect the optimal solution through a series of numerical experiments that utilize the algorithm.
 
 
Manuscript Received : 2002
Manuscript Published : 2002
 
 
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