Pricing with reference price effects

1.Background
The purpose of this project is to test the impact of reference price effects on consumer utility and estimate the parameters of consumer utility function, furthermore, to test the profit improvement brought by the pricing strategy incorporating reference price effects.

2.Tools
The application of this project requires R software.
We use R studio software to estimate the parameter of consumer utility function. Specifically, we write EM algorithm to estimate parameters and use boostrap method to do the t-test. Then we use R studio to test the profit improvement brought by the pricing strategy incorporating reference price effects.

3.Usage
R-Files
Under the R folder we created two folders, the “Estimation” folder is to estimate parameter of consumer utility function and to do the t-test, and the “Optimization” folder is to test the profit improvement brought by the pricing strategy incorporating reference price effects.

(1) Estimation files
Under this folder, we created two files, the “EM” file is used to estimate parameters of utility function by EM algorithm, and the “BS” file is used to resample the parameters for t-test.

① EM file
The data file is an Excel file including: price of each product on sales day (p1, p2, p3), sales of each product and the sum of sales on sales day (n1, n2, n3, nt).
After that, we use EM algorithm to estimate the parameters of utility function.

② BS file
In this file, we use boostrap method to do t-test of estimating parameters. Specifically, we resample some data from the Excel file randomly and repeat EM algorithm by the samples.

(2)Optimization file
Under this folder, we created the “Opt” file, which is used to test the profit improvement brought by the pricing strategy incorporating reference price effects.
First, we import the parameters estimated by EM algorithm. Then we calculate the profit that can be obtained using a pricing strategy that incorporates reference price effects. Finally, we calculate the gap between the profit from the pricing strategy that incorporates reference price effects and the profit from the pricing strategy that neglects reference price effects.