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

Management Science, Vol. 58, No. 3, March 2012, pp. 570-586

34 Pages Posted: 3 Feb 2014 Last revised: 7 Oct 2018

See all articles by J. Michael Harrison

J. Michael Harrison

Stanford Graduate School of Business

N. Bora Keskin

Duke University - Fuqua School of Business

Assaf Zeevi

Columbia Business School - Decision Risk and Operations

Date Written: May 22, 2011

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.

Keywords: Revenue management, pricing, estimation, Bayesian learning, exploration-exploitation

Suggested Citation

Harrison, J. Michael and Keskin, N. Bora and Zeevi, Assaf, Bayesian Dynamic Pricing Policies: Learning and Earning Under a Binary Prior Distribution (May 22, 2011). Management Science, Vol. 58, No. 3, March 2012, pp. 570-586, Available at SSRN: https://ssrn.com/abstract=2389764

J. Michael Harrison

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4727 (Phone)
650-725-6152 (Fax)

N. Bora Keskin (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States

HOME PAGE: http://faculty.fuqua.duke.edu/~nk145/

Assaf Zeevi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-9678 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www.gsb.columbia.edu/faculty/azeevi/

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