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Solving the leakage problem

Consumer leakage hurts both the producer and the consumers, and therefore all players have an incentive to counteract it. Both consumers and producers can do this by putting more emphasis on exploration as opposed to (pure) exploitation. Consumers could use a variety of schemes; for example, they could choose to subscribe at random with a non-zero probability even if their expected surplus is less than the subscription fee, and this probability could diminish monotonically as the difference between these quantities increases. Producers could fight leakage by temporarily decreasing prices to resurrect consumers who have mistakenly disenfranchised themselves, in hopes that, with additional samples, the consumers will increase their estimated surplus to levels that can support higher prices. One might expect that consumers could be enticed back into the market even with small discounts, since, once their tex2html_wrap_inline1520 ventures into a realm where subscription appears to be unprofitable, it is frozen at this just-barely-unprofitable value gif.

Here we focus on the producer's strategy for enticing overly pessimistic consumers back into the market. (This is not to deny that consumers' exploration strategies merit serious study.) From our study of consumer leakage, it is apparent that the producer's strategy must involve dynamic pricing, and that it must cope with a profit landscape that changes dynamically due to shifts caused by consumers' ongoing attempts to learn an estimate of g. It also seems most likely that the pricing strategy would involve stochastic search on this dynamically changing landscape, rather than following some pre-planned schedule.

The dynamically changing nature of the profit landscape in our problem limits the applicability of standard stochastic optimization techniques. For example, approaches such as simulated annealing implicitly assume that the search is being conducted on a static landscape as the value of its temperature parameter is lowered. On the other hand, standard gradient-based optimization approaches are of limited use because it is often too hard to determine the gradient of the profit landscape for general g and h distributions or for different price structures. More sophisticated approaches that are currently oriented towards static landscapes might be modified to handle dynamic landscapes. In this paper, we apply a simple direct search method called the amoeba algorithm for profit maximization. The amoeba algorithm is a good candidate optimizer since it makes very few assumptions about the underlying problem domain. Although the amoeba can get stuck at local optima, our preliminary work indicates that it works well for a variety of g and h distributions, even in problems where the price structure involves as many as ten parameters [3].


next up previous
Next: The Amoeba algorithm Up: Rational and Bounded-Rational Players Previous: Uninformed consumers

kephart
Thu Nov 18 11:46:57 EST 1999