Static Pricing: Universal Guarantees for Reusable Resources

TL;DR

This paper analyzes static pricing strategies for reusable resources, proving they guarantee a significant fraction of the optimal profit, market share, and service level across various settings, including cloud and shared vehicle markets.

Contribution

It provides the first theoretical guarantees for static pricing policies in reusable resource markets, showing they achieve at least 78.9% of optimal performance under general conditions.

Findings

Static pricing guarantees 78.9% of optimal profit, market share, and service level.

For two units with linear demand, static pricing guarantees 95.5% of profit.

Numerical results support the robustness of static pricing performance.

Abstract

We consider a fundamental pricing model in which a fixed number of units of a reusable resource are used to serve customers. Customers arrive to the system according to a stochastic process and upon arrival decide whether or not to purchase the service, depending on their willingness-to-pay and the current price. The service time during which the resource is used by the customer is stochastic and the firm may incur a service cost. This model represents various markets for reusable resources such as cloud computing, shared vehicles, rotable parts, and hotel rooms. In the present paper, we analyze this pricing problem when the firm attempts to maximize a weighted combination of three central metrics: profit, market share, and service level. Under Poisson arrivals, exponential service times, and standard assumptions on the willingness-to-pay distribution, we establish a series of results that characterize the performance of static pricing in such environments. In particular, while an optimal policy is fully dynamic in such a context, we prove that a static pricing policy simultaneously guarantees 78.9% of the profit, market share, and service level from the optimal policy. Notably, this result holds for any service rate and number of units the firm operates. Our proof technique relies on a judicious construction of a static price that is derived directly from the optimal dynamic pricing policy. In the special case where there are two units and the induced demand is linear, we also prove that the static policy guarantees 95.5% of the profit from the optimal policy. Our numerical findings on a large testbed of instances suggest that the latter result is quite indicative of the profit obtained by the static pricing policy across all parameters.