Revenue and reputation: A stochastic control approach to profit maximization

Profit is a function of multiple variables, including demand, cost of a product and/or service and its price. A myopic approach to business that compromises quality for profit would cause customer dissatisfaction. Customer satisfaction has its effect on business' reputation through reviews on websites like Yelp, Amazon, eBay and thus affects profitability for a business. An additional factor that influences profitability is marketing the product/service, through advertising and promotional deals to attract customers. Overall, there is an intricate relationship that couples quality, reputation, demand and product-marketing, all of which should be driven towards maximizing profitability for a business. This paper formulates profit maximization problem as a static optimization problem, based on relationships among underlying variables and derives a dynamic decision policy from that. This formulation factors in variability caused by uncontrollable market factors. This paper presents a profit maximization scheme that is agnostic to the distribution of the market factors and proves its near-optimality.

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