Dynamic Pricing Through Sampling Based Optimization

38 Pages Posted: 27 Jan 2011

See all articles by Ruben Lobel

Ruben Lobel

University of Pennsylvania - Operations & Information Management Department

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: October 14, 2010

Abstract

In this paper we develop an approach to dynamic pricing that combines ideas from data-driven and robust optimization to address the uncertain and dynamic aspects of the problem. In our setting, a firm offers multiple products to be sold over a fixed discrete time horizon. Each product sold consumes one or more resources, possibly sharing the same resources among different products. The firm is given a fixed initial inventory of these resources and cannot replenish this inventory during the selling season. We assume there is uncertainty about the demand seen by the firm for each product and seek to determine a robust and dynamic pricing strategy that maximizes revenue over the time horizon. While the traditional robust optimization models are tractable, they give rise to static policies and are often too conservative. The main contribution of this paper is the exploration of closed-loop pricing policies for different robust objectives, such as MaxMin, MinMax Regret and MaxMin Ratio. We introduce a sampling based optimization approach that can solve this problem in a tractable way, with a confidence level and a robustness level based on the number of samples used. We will show how this methodology can be used for data-driven pricing or adapted for a random sampling optimization approach when limited information is known about the demand uncertainty. Finally, we compare the revenue performance of the different models using numerical simulations, exploring the behavior of each model under different sample sizes and sampling distributions.

Keywords: dynamic pricing, data-driven, sampling based optimization, robust optimization

Suggested Citation

Lobel, Ruben and Perakis, Georgia, Dynamic Pricing Through Sampling Based Optimization (October 14, 2010). Available at SSRN: https://ssrn.com/abstract=1748426 or http://dx.doi.org/10.2139/ssrn.1748426

Ruben Lobel (Contact Author)

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

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