Optimal pricing using online auction experiments: A Pólya tree approach

Abstract

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 Pólya tree approach which, given the limited nature of the data, requires a specially tailored implementation. Avoiding the need for a priori parametric assumptions, the Pólya 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.