TY - JOUR

T1 - Analysis of cross-price effects on markdown policies by using function approximation techniques

AU - Coşgun, Özlem

AU - Kula, Ufuk

AU - Kahraman, Cengiz

PY - 2013/11

Y1 - 2013/11

N2 - Markdown policies for product groups having significant cross-price elasticity among each other should be jointly determined. However, finding optimal policies for product groups becomes computationally intractable as the number of products increases. Therefore, we formulate the problem as a Markov decision process and use approximate dynamic programming approach to solve it. Since the state space is multidimensional and very large, the number of iterations required to learn the state values is enormous. Therefore, we use aggregation and neural networks in order to approximate the value function and to determine the optimal markdown policies approximately. In a numerical study, we provide insights on the behavior of markdown policies when one product is expensive, the other is cheap and both have the same price. We also provide insights and compare the markdown policies for the cases in which there is a substitution effect between products and the products are independent.

AB - Markdown policies for product groups having significant cross-price elasticity among each other should be jointly determined. However, finding optimal policies for product groups becomes computationally intractable as the number of products increases. Therefore, we formulate the problem as a Markov decision process and use approximate dynamic programming approach to solve it. Since the state space is multidimensional and very large, the number of iterations required to learn the state values is enormous. Therefore, we use aggregation and neural networks in order to approximate the value function and to determine the optimal markdown policies approximately. In a numerical study, we provide insights on the behavior of markdown policies when one product is expensive, the other is cheap and both have the same price. We also provide insights and compare the markdown policies for the cases in which there is a substitution effect between products and the products are independent.

KW - Aggregation

KW - Approximate dynamic programming

KW - Artificial neural networks

KW - Cross-price elasticity

KW - Dynamic pricing

KW - Markdown optimization

UR - http://www.scopus.com/inward/record.url?scp=84885423670&partnerID=8YFLogxK

U2 - 10.1016/j.knosys.2013.08.029

DO - 10.1016/j.knosys.2013.08.029

M3 - Article

AN - SCOPUS:84885423670

SN - 0950-7051

VL - 53

SP - 173

EP - 184

JO - Knowledge-Based Systems

JF - Knowledge-Based Systems

ER -