Simultaneously learning and optimizing using controlled variance pricing

A.V. den Boer, Bert Zwart

Research output: Contribution to journalArticleAcademicpeer-review

54 Citations (Scopus)

Abstract

Price experimentation is an important tool for firms to find the optimal selling price of their products. It should be conducted properly, since experimenting with selling prices can be costly. A firm, therefore, needs to find a pricing policy that optimally balances between learning the optimal price and gaining revenue. In this paper, we propose such a pricing policy, called controlled variance pricing (CVP). The key idea of the policy is to enhance the certainty equivalent pricing policy with a taboo interval around the average of previously chosen prices. The width of the taboo interval shrinks at an appropriate rate as the amount of data gathered gets large; this guarantees sufficient price dispersion. For a large class of demand models, we show that this procedure is strongly consistent, which means that eventually the value of the optimal price will be learned, and derive upper bounds on the regret, which is the expected amount of money lost due to not using the optimal price. Numerical tests indicate that CVP performs well on different demand models and time scales.
Original languageEnglish
Pages (from-to)770-783
Number of pages14
JournalManagement science
Volume60
Issue number3
DOIs
Publication statusPublished - Mar 2014

Keywords

  • sequential decision problems
  • statistical learning
  • IR-93164
  • Dynamic pricing
  • METIS-309657
  • EWI-25298

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