Dynamic Pricing through Data Sampling

Abstract

We study a dynamic pricing problem, where a firm offers a product to be sold over a fixed time horizon. The firm has a given initial inventory level, but there is uncertainty about the demand for the product in each time period. The objective of the firm is to determine a dynamic pricing strategy that maximizes revenue throughout the entire selling season. We develop a tractable optimization model that directly uses demand data, therefore creating a practical decision tool. We show computationally that regret-based objectives can perform well when compared to average revenue maximization and to a Bayesian approach. The modeling approach proposed in this study could be particularly useful for risk-averse managers with limited access to historical data or information about the true demand distribution. Finally, we provide theoretical performance guarantees for this sampling-based solution.