Fast Revenue Maximization

TL;DR

This paper develops a data-driven pricing framework that quantifies the value of historical demand data, enabling near-optimal, robust pricing strategies with limited data and practical constraints.

Contribution

It introduces an exact reduction transforming the pricing problem into a tractable optimization, providing explicit guarantees and guiding efficient price experimentation.

Findings

The reduction characterizes the maximin revenue ratio.

Sign of revenue gradient guides local pricing decisions.

Method achieves near-optimal performance with 25-100 samples per price.

Abstract

Problem definition: We study a data-driven pricing problem in which a seller sets a price for a single item based on demand observed at a limited number of historical prices. Our goal is to quantify the value of such information and to guide efficient price experimentation under practical constraints. Methodology/results: Our main methodological contribution is an exact reduction that characterizes the maximin revenue ratio, defined as the worst-case revenue achievable using only past data relative to the optimal revenue under full information. This reduction transforms an infinite-dimensional problem into a tractable one-dimensional optimization problem, allowing us to compute near-optimal pricing policies with explicit guarantees and to precisely quantify the value of historical data. Managerial implications: Motivated by practical constraints that limit price changes, we first evaluate the value of local information and show that the sign of the revenue gradient at a single price can provide significant guidance. We then use our framework to design efficient price experiments: we develop a method to select the next price to test so as to maximize future robust performance, and show how to substantially reduce the number of experiments needed to achieve target revenue guarantees in dynamic pricing. Finally, we show that our approach remains effective with noisy demand data, achieving near-optimal performance with as few as 25 to 100 samples per price.