Technical Note—Dynamic Pricing and Demand Learning with Limited Price Experimentation
Wang Chi Cheung, David Simchi-Levi, He Wang
Operations Research · 2017 · Volume 65 · Issue 6
Abstract
In a dynamic pricing problem where the demand function is not known a priori, price experimentation can be used as a demand learning tool. Existing literature usually assumes no constraint on price changes, but in practice, sellers often face business constraints that prevent them from conducting extensive experimentation. We consider a dynamic pricing model where the demand function is unknown but belongs to a known finite set. The seller is allowed to make at most m price changes during T periods. The objective is to minimize the worst-case regret—i.e., the expected total revenue loss compared with a clairvoyant who knows the demand distribution in advance. We demonstrate a pricing policy that incurs a regret of O (log ( m ) T ), or m iterations of the logarithm. Furthermore, we describe an implementation of this pricing policy at Groupon, a large e-commerce marketplace for daily deals. The field study shows significant impact on revenue and bookings. The e-companion is available at https://doi.org/10.1287/opre.2017.1629 .
Keywords
revenue management, dynamic pricing, learning–earning trade-off, price experimentation
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