Operations Research seminar

Operations Research seminar

Optimal continuous pricing with strategic customers

Jose Correa, Universidad de Chile, Santiago


An important problem in electronic commerce is that of finding optimal pricing mechanisms to sell a single item when the number of buyers is random and they arrive over time. In this paper we combine ideas from auction theory and recent work on pricing with strategic consumers to derive the optimal continuous pricing scheme in this situation. Our main assumption is that buyers are split among those who have a high valuation and those having a low valuation for the item. We conclude that, depending on the specific instance it is optimal to either use a fixed price strategy, or to use steep markdowns by the end of the selling season. We then extend these result to a general valuation setting using optimal control theory rather than following a Myersonian approach. Our work differs from recent work in the area of dynamic mechanism design in that the buyers and the seller discount the future differently.

This is joint work with Luis BriceƱo and Andres Perlroth.