Deep Reinforcement Learning for Sequential Targeting
Management Science, forthcoming
48 Pages Posted: 5 Dec 2019 Last revised: 3 May 2022
Date Written: December 5, 2021
Deep reinforcement learning (DRL) has opened up many unprecedented opportunities in revolutionizing the digital marketing field. In this study, we designed a DRL-based personalized targeting strategy in a sequential setting. We show that the strategy is able to address three important challenges of sequential targeting. 1) Forward-looking: balancing between a firm’s current revenue and future revenues; 2) Earning-while-learning: maximizing profits while continuously learning through exploration-exploitation; 3) Scalability: coping with a high-dimensional state and policy space. We illustrate the above through a novel design of a DRL-based artificial intelligence (AI) agent. To better adapt DRL to complex consumer behavior dimensions, we proposed a quantization-based uncertainty learning heuristic for efficient exploration-exploitation. Our policy evaluation results through simulation suggest that the proposed DRL agent generates 26.75% more long-term revenues than can the non-DRL approaches on average, and learns 76.92% faster than the second-fastest model among all benchmarks. Further, in order to better understand the potential underlying mechanisms, we conducted multiple interpretability analyses to explain the patterns of learned optimal policy at both the individual and population levels. Our findings provide important managerial-relevant and theory-consistent insights. For instance, consecutive price promotions at the beginning can capture price-sensitive consumers’ immediate attention, while carefully spaced non-promotional “cool-down” periods between price promotions can allow consumers to adjust their reference points. Besides, consideration of future revenues is necessary from a long-term horizon, but weighing the future too much can also dampen revenues. In addition, analyses of heterogeneous treatment effects suggest that the optimal promotion sequence pattern highly varies across the consumer engagement stages. Overall, our study results demonstrate DRL’s potential to optimize these strategies’ combinations to maximize long-term revenues.
Keywords: Deep Reinforcement Learning, Field experiments, Targeting, Promotions, Sequential actions, Mobile
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