Title
Dynamic Pricing with a Prior on Market Response
Abstract
We study a problem of dynamic pricing faced by a vendor with limited inventory, uncertain about demand, and aiming to maximize expected discounted revenue over an infinite time horizon. The vendor learns from purchase data, so his strategy must take into account the impact of price on both revenue and future observations. We focus on a model in which customers arrive according to a Poisson process of uncertain rate, each with an independent, identically distributed reservation price. Upon arrival, a customer purchases a unit of inventory if and only if his reservation price equals or exceeds the vendor's prevailing price. We propose a simple heuristic approach to pricing in this context, which we refer to as decay balancing. Computational results demonstrate that decay balancing offers significant revenue gains over recently studied certainty equivalent and greedy heuristics. We also establish that changes in inventory and uncertainty in the arrival rate bear appropriate directional impacts on decay balancing prices in contrast to these alternatives, and we derive worst-case bounds on performance loss. We extend the three aforementioned heuristics to address a model involving multiple customer segments and stores, and provide experimental results demonstrating similar relative merits in this context.
Year
DOI
Venue
2010
10.1287/opre.1090.0729
Operations Research
Keywords
DocType
Volume
arrival rate bear,dynamic pricing,significant revenue gain,reservation price,market response,greedy heuristics,aforementioned heuristics,decay balancing,revenue management.,limited inventory,prevailing price,demand learning,customer purchase
Journal
58
Issue
ISSN
Citations 
1
0030-364X
48
PageRank 
References 
Authors
2.57
6
2
Name
Order
Citations
PageRank
Vivek F. Farias137124.24
Benjamin Van Roy21762211.73