Dynamic Pricing with a Prior on Market Response

We study a problem of dynamic pricing faced by a vendor with limited inventory, uncertain about demand, 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 ...

• Type: Journal
• Year: 2010
• Where: IOR
• Authors: Vivek F. Farias, Benjamin Van Roy
• Keywords: Customer, IOR 2010, Reservation Price, Vendor’s Prevailing Price