SOLO FTRL algorithm for production management with transfer prices

TL;DR

This paper applies the SOLO FTRL algorithm to a production management problem involving transfer prices, demonstrating convergence and stability in static and dynamic settings through theoretical analysis and computer experiments.

Contribution

It introduces the application of SOLO FTRL to transfer pricing in production management, providing convergence rates and stability results without requiring detailed cost function information.

Findings

Fast stabilization of transfer prices in static case

Prices and supply-demand differences fluctuate around equilibrium in dynamic case

Algorithm achieves $T^{-1/4}$ convergence rate for optimality and feasibility

Abstract

We consider a firm producing and selling $d$ commodities, and consisting from $n$ production and $m$ sales divisions. The firm manager tries to stimulate the best division performance by sequentially selecting internal commodity prices (transfer prices). In the static problem under general strong convexity and compactness assumptions we show that the SOLO FTRL algorithm of Orabona and Pal (2018), applied to the dual problem, gives the estimates of order $T^{-1/4}$ in the number $T$ of iterations for the optimality gap and feasibility residuals. This algorithm uses only the information on division reactions to current prices. It does not depend on any parameters and requires no information on the production and cost functions. The results of similar nature are obtained for the dynamic problem, where these functions depend on an i.i.d. sequence of random variables. We present two computer experiments with one and two commodities. In the static case the transfer prices and the difference between the supply and demand demonstrate fast stabilization. In the dynamic case the same quantities fluctuate around equilibrium values after a short transition phase.