A Choice-Based Dynamic Programming Approach for Setting Opaque Prices
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Anderson, Chris K.; Xie, Xiaoqing
Opaque pricing is a form of pricing where certain characteristics of the product or service are hidden from the consumer until after purchase. In essence, opaque selling transforms a differentiated good into a commodity. Opaque pricing has become popular in service pricing as it allows firms to sell their differentiated product at higher prices to regular brand loyal customers while simultaneously selling to non-brand loyal customers at discounted prices. We use a nested logit model in combination with logistic regression and dynamic programming to illustrate how a service firm can optimally set prices on an opaque sales channel. The choice model allows the characterization of consumer trade-offs when purchasing opaque products while the dynamic programming approach allows the characterization of the optimal pricing policy as a function of inventory and time remaining. We compare optimal prices and expected revenues when dynamic pricing is restricted to daily price changes. We provide an illustrative example using data from an opaque selling mechanism (Hotwire.com) and a Washington DC-based hotel.
revenue management; dynamic programming; marketing; pricing; buyer behavior
Required Publisher Statement: © Wiley. Final version published as: Anderson, C. K., & Xie, X. (2012). A choice-based dynamic programming approach for setting opaque prices. Production and Operations Management, 21(3), 590-605. DOI: 10.1111/j.1937-5956.2011.01293.x. Reprinted with permission. All rights reserved.