Dynamic Pricing in High-Dimensions

47 Pages Posted: 20 Oct 2016 Last revised: 1 Jan 2018

See all articles by Adel Javanmard

Adel Javanmard

University of Southern California - Data Sciences and Operations

Hamid Nazerzadeh

University of Southern California - Marshall School of Business

Date Written: December 31, 2017

Abstract

We study the pricing problem faced by a firm that sells a large number of products, described via a wide range of features, to customers that arrive over time. Customers independently make purchasing decisions according to a general choice model that includes products features and customers' characteristics, encoded as d-dimensional numerical vectors, as well as the price offered.The parameters of the choice model are a-priori unknown to the firm, but can be learned as the (binary-valued) sales data accrues over time. The firm's objective is to minimize the regret, i.e., the expected revenue loss against a clairvoyant policy that knows the parameters of the choice model in advance, and always offers the revenue-maximizing price. This setting is motivated in part by the prevalence of online marketplaces that allow for real-time pricing.

We assume a structured choice model, parameters of which depend on s out of the d product features. We propose a dynamic policy, called Regularized Maximum Likelihood Pricing (RMLP) that leverages the (sparsity) structure of the high-dimensional model and obtains a logarithmic regret in T. More specifically, the regret of our algorithm is of O(s log d log T). Furthermore, we show that no policy can obtain regret better than O(s (log d log T)).

Keywords: Revenue Management, Dynamic Pricing, High-dimensional Regression, Maximum Likelihood, Sparsity, Hypothesis Testing

Suggested Citation

Javanmard, Adel and Nazerzadeh, Hamid, Dynamic Pricing in High-Dimensions (December 31, 2017). Marshall School of Business Working Paper No. 17-6, Available at SSRN: https://ssrn.com/abstract=2855843 or http://dx.doi.org/10.2139/ssrn.2855843

Adel Javanmard

University of Southern California - Data Sciences and Operations ( email )

701 Exposition Blvd
Los Angeles, CA
United States

Hamid Nazerzadeh (Contact Author)

University of Southern California - Marshall School of Business ( email )

Bridge Memorial Hall
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~nazerzad/

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