Title: Interpretation of Lagrange Multipliers in Nonlinear Pricing Problem

Authors: Kimmo Berg and Harri Ehtamo

Conference: Informs Annual Meeting 11.-14.10.2009, San Diego, USA

Keywords: Lagrange multipliers, nonlinear pricing, flow network, conservation law, stability, sensitivity

Nonlinear pricing is an application of mechanism design, which is a central problem in economics and game theory. The Lagrange multipliers in the pricing problem can be interpreted as a network of flows between the buyer types. The multipliers satisfy a conservation law, and the non-uniqueness of the multipliers is connected to the stability of the solution structure. The digraph interpretation can be used in computing the solution and solving the pricing problem under limited information.