Real-Time Dynamic Pricing with Minimal and Flexible Price Adjustment

Chen, Q, Jasin, S and Duenyas, I (2016) Real-Time Dynamic Pricing with Minimal and Flexible Price Adjustment. Management Science, 62 (8). pp. 2437-2455. ISSN 0025-1909

Abstract

We study a standard dynamic pricing problem where the seller (a monopolist) possesses a finite amount of inventories and attempts to sell the products during a finite selling season. Despite the potential benefits of dynamic pricing, many sellers still adopt a static pricing policy because of (1) the complexity of frequent reoptimizations, (2) the negative perception of excessive price adjustments, and (3) the lack of flexibility caused by existing business constraints. In this paper, we develop a family of pricing heuristics that can be used to address all these challenges. Our heuristic is computationally easy to implement; it requires only a single optimization at the beginning of the selling season and automatically adjusts the prices over time. Moreover, to guarantee a strong revenue performance, the heuristic only needs to adjust the prices of a small number of products and do so infrequently. This property helps the seller focus his effort on the prices of the most important products instead of all products. In addition, in the case where not all products are equally admissible to price adjustment (due to existing business constraints such as contractual agreement, strategic product positioning, etc.), our heuristic can immediately substitute the price adjustment of the original products with the price adjustment of similar products and maintain an equivalent revenue performance. This property provides the seller with extra flexibility in managing his prices.