Price optimization with reference price effects: A generalized Benders’ decomposition method and a myopic heuristic approach

We consider a multi-period revenue maximization and pricing optimization problem in the presence of reference prices. We formulate the problem as a mixed integer nonlinear program and develop a generalized Benders’ decomposition algorithm to solve it. In addition, we propose a myopic heuristic and discuss the conditions under which it produces efficient solutions. We provide analytical results as well as numerical computations to illustrate the efficiency of the solution approaches as well as some managerial pricing insights.