Data Based Dynamic Pricing and Inventory Control with Censored Demand and Limited Price Changes

61 Pages Posted: 9 Dec 2015 Last revised: 11 Feb 2020

See all articles by Boxiao Chen

Boxiao Chen

University of Illinois at Chicago - College of Business Administration

Xiuli Chao

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Yining Wang

University of Florida - Warrington College of Business Administration

Date Written: July 1, 2017

Abstract

A firm makes pricing and inventory replenishment decisions for a product over T periods to maximize its expected total profit. Demand is random and price sensitive, and unsatisfied demands are lost and unobservable (censored demand). The firm knows the demand process up to some parameters and needs to learn them through pricing and inventory experimentation. However, due to business constraints the firm is prevented from making frequent price changes, leading to correlated and dependent sales data. We develop data-driven algorithms by actively experimenting inventory and pricing decisions and construct maximum likelihood estimator with censored and correlated samples for parameter estimation. We analyze the algorithms using the T-period regret, defined as the profit loss of the algorithms over T periods compared with the clairvoyant optimal policy that knew the parameters a priori. For a so-called well-separated case, we show that the regret of our algorithm is O(T^{1/(m+1)}) when the number of price changes is limited by m >= 1, and is O(\log T) when limited by \beta \log T for some positive constant \beta>0; while for a more general case, the regret is O(T^{1/2}) when the underlying demand is bounded and O(T^{1/2} \log T) when the underlying demand is unbounded. We further prove that our algorithm for each case is the best possible in the sense that its regret rate matches with the theoretical lower bound.

Keywords: dynamic pricing, inventory replenishment, limited price changes, data-driven algorithm, censored demand, asymptotic analyses

Suggested Citation

Chen, Boxiao and Chao, Xiuli and Wang, Yining, Data Based Dynamic Pricing and Inventory Control with Censored Demand and Limited Price Changes (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=2700747 or http://dx.doi.org/10.2139/ssrn.2700747

Boxiao Chen (Contact Author)

University of Illinois at Chicago - College of Business Administration ( email )

601 S Morgan St
Chicago, IL 60607
United States

Xiuli Chao

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Yining Wang

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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