Bayesian Dynamic Pricing Policies: Learning and Earning Under a Binary Prior Distribution

J. Michael Harrison (), N. Bora Keskin () and Assaf Zeevi ()
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J. Michael Harrison: Graduate School of Business, Stanford University, Stanford, California 94305
N. Bora Keskin: Graduate School of Business, Stanford University, Stanford, California 94305
Assaf Zeevi: Graduate School of Business, Columbia University, New York, New York 10027

Management Science, 2012, vol. 58, issue 3, 570-586

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: revenue management; pricing; estimation; Bayesian learning; exploration-exploitation (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (69)

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