Dynamic pricing with real-time demand learning
Abstract
In many service industries, the firm adjusts the product price dynamically by taking into account the current product
inventory and the future demand distribution. Because the firm can easily monitor the product inventory, the success of
dynamic pricing relies on an accurate demand forecast. In this paper, we consider a situation where the firm does not
have an accurate demand forecast, but can only roughly estimate the customer arrival rate before the sale begins. As the
sale moves forward, the firm uses real-time sales data to fine-tune this arrival rate estimation. We show how the firm can
first use this modified arrival rate estimation to forecast the future demand distribution with better precision, and then
use the new information to dynamically adjust the product price in order to maximize the expected total revenue.
Numerical study shows that this strategy not only is nearly optimal, but also is robust when the true customer arrival
rate is much different from the original forecast. Finally, we extend the results to four situations commonly encountered
in practice: unobservable lost customers, time dependent arrival rate, batch demand, and discrete set of allowable
prices.
Description
The article of record as published may be located at http://dx.doi.org/10.1016/j.ejor.2005.01.041
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.Collections
Related items
Showing items related by title, author, creator and subject.
-
A demand forecasting model for a naval aviation intermediate level inventory -- the Shorebased Consolidated Allowance List (SHORCAL), Yokosuka, Japan
Onders, Randal J. (Monterey, California. Naval Postgraduate School, 1994-12);Recent initiatives associated with the military force drawdown and declining Department of Defense budget mandate reducing military investment in spare parts inventories while maintaining force readiness. It is therefore ... -
Analysis and evaluation of forecasting methods and tools to predict future demand for secondary chemical-biological configuration items
Ritchey, Chris D. (Monterey, California: Naval Postgraduate School, 2013-06);As the Engineering Support Activity (ESA) for numerous consumable Chemical Biological items managed by the Defense Logistics Agency (DLA), Edgewood Chemical Biological Center (ECBC) must be able to complete reviews of all ... -
FORECASTING CRITICAL AIRCRAFT LAUNCH AND RECOVERY EQUIPMENT (ALRE) COMPONENTS' DEMAND
Coleman, Dustin T.; Grimes, Jacob M.; Laryea, Macdonald (Monterey, CA; Naval Postgraduate School, 2018-12);Demand signals across the Navy’s NIMITZ Class Carrier (CVN) Aircraft Launch and Recovery Equipment (ALRE) market-basket are highly erratic and do not fit neatly into the traditional demand-based sparing construct. This ...