Data-Driven Approximation Schemes for Joint Pricing and Inventory Control Models

Hanzhang Qin (), David Simchi-Levi () and Li Wang ()
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Hanzhang Qin: Center for Computational Science and Engineering, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
David Simchi-Levi: Institute for Data, Systems, and Society and Department of Civil and Environmental Engineering, Massachusetts Institute of Technology, Cambridge, Cambridge, Massachusetts 02139; Operations Research Center, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
Li Wang: Operations Research Center, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Management Science, 2022, vol. 68, issue 9, 6591-6609

Abstract: We study the classic multiperiod joint pricing and inventory control problem in a data-driven setting. In this problem, a retailer makes periodic decisions on the prices and inventory levels of a product that she wishes to sell. The retailer’s objective is to maximize the expected profit over a finite horizon by matching the inventory level with a random demand, which depends on the price in each period. In reality, the demand functions or random noise distributions are usually difficult to know exactly, whereas past demand data are relatively easy to collect. We propose a data-driven approximation algorithm that uses precollected demand data to solve the joint pricing and inventory control problem. We assume that the retailer does not know the noise distributions or the true demand functions; instead, we assume either she has access to demand hypothesis sets and the true demand functions can be represented by nonnegative combinations of candidate functions in the demand hypothesis sets, or the true demand function is generalized linear. We prove the algorithm’s sample complexity bound: the number of data samples needed in each period to guarantee a near-optimal profit is O ( T 6 ϵ − 2 log T ) , where T is the number of periods, and ϵ is the absolute difference between the expected profit of the data-driven policy and the expected optimal profit. In a numerical study, we demonstrate the construction of demand hypothesis sets from data and show that the proposed data-driven algorithm solves the dynamic problem effectively and significantly improves the optimality gaps over the baseline algorithms.

Keywords: dynamic pricing; inventory control; revenue management; approximation algorithm; data-driven optimization; dynamic programming (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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