Optimal pricing using online auction experiments: A Pólya tree approach

Details Optimal pricing using online auction experiments: A Pólya tree approach Optimal pricing using online auction experiments: A Pólya tree approach

2012-03-16

arxiv.org/abs/1203.3653v1

Annals of Applied Statistics 2012, Vol. 6, No. 1, 55-82

Statistics

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Published in at http://dx.doi.org/10.1214/11-AOAS503 the Annals of Applied Statistics (http://www.imstat.org/aoas/) by the Ins

Scientific paper

10.1214/11-AOAS503

We show how a retailer can estimate the optimal price of a new product using observed transaction prices from online second-price auction experiments. For this purpose we propose a Bayesian P\'olya tree approach which, given the limited nature of the data, requires a specially tailored implementation. Avoiding the need for a priori parametric assumptions, the P\'olya tree approach allows for flexible inference of the valuation distribution, leading to more robust estimation of optimal price than competing parametric approaches. In collaboration with an online jewelry retailer, we illustrate how our methodology can be combined with managerial prior knowledge to estimate the profit maximizing price of a new jewelry product.

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