Dynamic pricing under nested logit demand

zbMATH Open1478.90090arXiv2101.04486MaRDI QIDQ5024972FDOQ5024972

Authors: David Müller, Vladimir Shikhman, Yuri Nesterov 

Publication date: 1 February 2022

Abstract: Recently, there is growing interest and need for dynamic pricing algorithms, especially, in the field of online marketplaces by offering smart pricing options for big online stores. We present an approach to adjust prices based on the observed online market data. The key idea is to characterize optimal prices as minimizers of a total expected revenue function, which turns out to be convex. We assume that consumers face information processing costs, hence, follow a discrete choice demand model, and suppliers are equipped with quantity adjustment costs. We prove the strong smoothness of the total expected revenue function by deriving the strong convexity modulus of its dual. Our gradient-based pricing schemes outbalance supply and demand at the convergence rates of $mathcalO(frac1t)$ and $mathcalO(frac1t^2)$, respectively. This suggests that the imperfect behavior of consumers and suppliers helps to stabilize the market.

Full work available at URL: https://arxiv.org/abs/2101.04486

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zbMATH Keywords

smoothingdiscrete choicedynamic pricingnested logittotal expected revenue function

Mathematics Subject Classification ID

Convex programming (90C25) Microeconomic theory (price theory and economic markets) (91B24)

Cited In (9)

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• Continuous-time dynamic pricing for stabilizing stochastic demand
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• The effect of demand variability on the adoption and design of a third party's pricing algorithm

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