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Learning dynamic prices in electronic retail markets with customer segmentation

Raju, CVL and Narahari, Y and Ravikumar, K (2006) Learning dynamic prices in electronic retail markets with customer segmentation. In: Annals of Operations Research, 143 (1). pp. 59-75.

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In this paper, we use reinforcement learning (RL) techniques to determine dynamic prices in an electronic monopolistic retail market. The market that we consider consists of two natural segments of customers, captives and shoppers. Captives are mature, loyal buyers whereas the shoppers are more price sensitive and are attracted by sales promotions and volume discounts. The seller is the learning agent in the system and uses RL to learn from the environment. Under (reasonable) assumptions about the arrival process of customers, inventory replenishment policy, and replenishment lead time distribution, the system becomes a Markov decision process thus enabling the use of a wide spectrum of learning algorithms. In this paper, we use the Q-learning algorithm for RL to arrive at optimal dynamic prices that optimize the seller’s performance metric (either long term discounted profit or long run average profit per unit time). Our model and methodology can also be used to compute optimal reorder quantity and optimal reorder point for the inventory policy followed by the seller and to compute the optimal volume discounts to be offered to the shoppers.

Item Type: Journal Article
Publication: Annals of Operations Research
Publisher: Springer Netherlands
Additional Information: Copyright of this article belongs to Springer Netherlands.
Keywords: Electronic retail market;Dynamic pricing;Customer segmentation;Captives;Shoppers;Volume discounts;Inventory replenishment;Markov decision process;Reinforcement learning - Q-learning
Department/Centre: Division of Electrical Sciences > Computer Science & Automation
Date Deposited: 31 May 2006
Last Modified: 14 Oct 2008 06:59
URI: http://eprints.iisc.ac.in/id/eprint/7185

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