A Note on Optimal Product Pricing

Abstract

We consider the problem of choosing prices of a set of products so as to maximize profit, taking into account self-elasticity and cross-elasticity, subject to constraints on the prices. We show that this problem can be formulated as maximizing the sum of a convex and concave function. We compare three methods for finding a locally optimal approximate solution. The first is based on the convex-concave procedure, and involves solving a short sequence of convex problems. Another one uses a custom minorization-maximization method, and involves solving a sequence of quadratic programs. The final method is to use a general purpose nonlinear programming method. In numerical examples all three converge reliably to the same local maximum, independent of the starting prices, leading us to believe that the prices found are likely globally optimal.