Harri Ehtamo

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Optimization and Game Theory Models of E-Markets
- A Survey

• Harri Ehtamo

Systems Analysis Laboratory Helsinki University
of Technology www.sal.tkk.fi
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What is E-commerce?

• New commercial affairs arising
• in the Internet
• through the use of various
• Electronic Shelf Labeling Systems

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New technology allows the retailers

• to collect, process and deliver sales / customer
  data
• to plan intelligent pricing strategies
• to change prices frequently at low cost

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• Data mining
• ? personalization
• ? customization
• Amazon.com online price tests with customers

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Pricing strategies

• Posted price mechanisms
• take-it-or-leave-it prices
• Price-discovery mechanisms
• prices determined by bidding processes, e.g.,
  auctions

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Mechanism design Optimization and game theory
tools for pricing goods

• Price discrimination e.g., nonlinear pricing
• Combinatorial auctions

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NP complete CAP N bidders, M objects
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Applications

• Nonlinear pricing in the design of electricity
  tariffs (Wilson, Räsänen et. al, in the 1990s)
• Dynamic pricing policies in brick-and-mortar
  stores (in the 2000s)
• Combinatorial Auctions (FCCs Narrow Band Auction
  1994, CAs in procurement of logistic services
  1993)

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Research questions

• How to exploit the vast resources of online data
  to improve the shopping process
• Theoretical work to model descriptively,
  predictively and normatively some aspects of the
  process to enable competitional advances

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Literature

• A.M. Geoffrion, R. Krihnan Special issue on
  E-Business and Management Science, Management
  Science, Vol. 49, No. 10/11, November 2003
• R.B. Wilson Nonlinear Pricing, Oxford
  University Press, 1993
• M. Räsänen, J. Ruusunen, R.P. Hämäläinen
  Optimal tariff design under consumer
  self-selection, Energy Economics 19, pp.
  151-167, 1997
• S. de Vries, R.V. Vohra Combinatorial Auctions
  A Survey, INFORMS J. on Computing, Vol. 15, No.
  3, pp. 284-309, 2003