Dynamic Pricing Strategies in the Presence of Demand Shifts
Manufacturing & Service Operations Management, 2014, 16(4):513-528
33 Pages Posted: 16 Aug 2013 Last revised: 15 Jun 2016
Date Written: June 6, 2012
Abstract
Many factors introduce the prospect of changes in the demand environment that a firm faces, with the specifics of such changes not necessarily known in advance. If and when realized, such changes affect the delicate balance between demand and supply and thus current prices should account for these future possibilities. We study the dynamic pricing problem of a retailer facing the prospect of a change in the demand function during a finite selling season with no inventory replenishment opportunity. In particular, the time of the change and the postchange demand function are unknown upfront, and we focus on the fundamental trade-off between collecting revenues from current demand and doing so for postchange demand, with the capacity constraint introducing the main tension. We develop a formulation that allows for isolating the role of dynamic pricing in balancing inventory consumption throughout the horizon. We establish that, in many settings, optimal pricing policies follow a monotone path up to the change in demand. We show how one may compare upfront the attractiveness of pre- and postchange demand conditions and how such a comparison depends on the problem primitives. We further analyze the impact of the model inputs on the optimal policy and its structure, ranging from the impact of model parameter changes to the impact of different representations of uncertainty about future demand.
Keywords: revenue management, dynamic pricing, non-stationary demand, model uncertainty
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
On the Minimax Complexity of Pricing in a Changing Environment
By Omar Besbes and Assaf Zeevi
-
Demand Learning and Dynamic Pricing for Multi-Version Products
By Guillermo Gallego and Masoud Talebian
-
Dynamic Pricing Through Data Sampling
By Maxime C. Cohen, Ruben Lobel, ...
-
Optimal Pricing Policy in the Presence of Experience Effects
By Francis Clarke, Masako N. Darrough, ...
-
Pricing to Accelerate Demand Learning in Dynamic Assortment Planning for Perishable Products
By Masoud Talebian, Natashia Boland, ...
-
Dynamic Pricing – State-of-The-Art
By Jochen Gönsch, Robert Klein, ...
-
Non-Stationary Stochastic Optimization
By Omar Besbes, Yonatan Gur, ...
-
Intertemporal Pricing under Minimax Regret
By Rene Caldentey, Ying Liu, ...
-
Acitvely Learning by Pricing: A Model of an Experimenting Seller
By Tim Willems