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A Bayesian Approach to Pricing

John Cook has some thoughts on an interesting problem:

Suppose you want to determine how to price a product and you initially don’t know what the market is willing to pay. This post outlines some of the things you might think about, and how Bayesian modeling might help.

This post is not the final word on the subject, or even my final word on the subject. It is essentially a reply to a friend’s question turned into a blog post rather than an email.

This is a really interesting problem. Price is ultimately a signal rather than the solution. This is an attempt to understand how you start to build up enough information to start setting effective prices. Over a long enough timeframe, we’ll eventually land on a commonly accepted price but that’s an economist’s way of hand-waving away the process.