Bayesian Dynamic Pricing Policies: Learning and Earning Under a Binary Prior Distribution
Top Cited Papers
- 1 March 2012
- journal article
- Published by Institute for Operations Research and the Management Sciences (INFORMS) in Management Science
- Vol. 58 (3), 570-586
- https://doi.org/10.1287/mnsc.1110.1426
Abstract
Motivated by applications in financial services, we consider a seller who offers prices sequentially to a stream of potential customers, observing either success or failure in each sales attempt. The parameters of the underlying demand model are initially unknown, so each price decision involves a trade-off between learning and earning. Attention is restricted to the simplest kind of model uncertainty, where one of two demand models is known to apply, and we focus initially on performance of the myopic Bayesian policy (MBP), variants of which are commonly used in practice. Because learning is passive under the MBP (that is, learning only takes place as a by-product of actions that have a different purpose), it can lead to incomplete learning and poor profit performance. However, under one additional assumption, a constrained variant of the myopic policy is shown to have the following strong theoretical virtue: the expected performance gap relative to a clairvoyant who knows the underlying demand model is bounded by a constant as the number of sales attempts becomes large. This paper was accepted by Gérard P. Cachon, stochastic models and simulation.Keywords
This publication has 18 references indexed in Scilit:
- Dynamic Pricing with a Prior on Market ResponseOperations Research, 2010
- Dynamic Pricing Without Knowing the Demand Function: Risk Bounds and Near-Optimal AlgorithmsOperations Research, 2009
- Dynamic Pricing with Online Learning and Strategic Consumers: An Application of the Aggregating AlgorithmOperations Research, 2009
- Strategic ExperimentationEconometrica, 1999
- Controlling a Stochastic Process with Unknown ParametersEconometrica, 1988
- Price dispersion and incomplete learning in the long runJournal of Economic Dynamics and Control, 1984
- Iterated least squares in multiperiod controlAdvances in Applied Mathematics, 1982
- Some Experimental Results on the Statistical Properties of Least Squares Estimates in Control ProblemsEconometrica, 1976
- A two-armed bandit theory of market pricingJournal of Economic Theory, 1974
- Some aspects of the sequential design of experimentsBulletin of the American Mathematical Society, 1952