Personalized Dynamic Pricing with Machine Learning: High Dimensional Features and Heterogeneous Elasticity
Management Science, Vol. 67, No. 9, September 2021, pp. 5549-5568
53 Pages Posted: 25 May 2017 Last revised: 16 Sep 2021
Date Written: April 20, 2020
We consider a seller who can dynamically adjust the price of a product at the individual customer level, by utilizing information about customers' characteristics encoded as a d-dimensional feature vector. We assume a personalized demand model, parameters of which depend on s out of the d features. The seller initially does not know the relationship between the customer features and the product demand, but learns this through sales observations over a selling horizon of T periods. We prove that the seller's expected regret, i.e., the revenue loss against a clairvoyant who knows the underlying demand relationship, is at least of order s√T under any admissible policy. We then design a near-optimal pricing policy for a "semi-clairvoyant" seller (who knows which s of the d features are in the demand model) that achieves an expected regret of order s√T log T. We extend this policy to a more realistic setting where the seller does not know the true demand predictors, and show that this policy has an expected regret of order s√T (log d＋log T), which is also near-optimal. Finally, we test our theory on simulated data and on a data set from an online auto loan company in the United States. On both data sets, our experimentation-based pricing policy is superior to intuitive and/or widely-practiced customized pricing methods such as myopic pricing and segment-then-optimize policies. Furthermore, our policy improves upon the loan company's historical pricing decisions by 47% in expected revenue over a six-month period.
Keywords: dynamic pricing, demand learning, demand uncertainty, regret analysis, lasso, machine learning
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