On Dynamic Pricing with Covariates

• URL: http://arxiv.org/abs/2112.13254v3
• Date: Mon, 13 Nov 2023 13:55:32 GMT
• Title: On Dynamic Pricing with Covariates
• Authors: Hanzhao Wang, Kalyan Talluri, Xiaocheng Li
• Abstract summary: We show that UCB and Thompson sampling-based pricing algorithms can achieve an $O(dsqrtTlog T)$ regret upper bound. Our upper bound on the regret matches the lower bound up to logarithmic factors.
• Score: 6.6543199581017625
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: We consider dynamic pricing with covariates under a generalized linear demand model: a seller can dynamically adjust the price of a product over a horizon of $T$ time periods, and at each time period $t$, the demand of the product is jointly determined by the price and an observable covariate vector $x_t\in\mathbb{R}^d$ through a generalized linear model with unknown co-efficients. Most of the existing literature assumes the covariate vectors $x_t$'s are independently and identically distributed (i.i.d.); the few papers that relax this assumption either sacrifice model generality or yield sub-optimal regret bounds. In this paper, we show that UCB and Thompson sampling-based pricing algorithms can achieve an $O(d\sqrt{T}\log T)$ regret upper bound without assuming any statistical structure on the covariates $x_t$. Our upper bound on the regret matches the lower bound up to logarithmic factors. We thus show that (i) the i.i.d. assumption is not necessary for obtaining low regret, and (ii) the regret bound can be independent of the (inverse) minimum eigenvalue of the covariance matrix of the $x_t$'s, a quantity present in previous bounds. Moreover, we consider a constrained setting of the dynamic pricing problem where there is a limited and unreplenishable inventory and we develop theoretical results that relate the best achievable algorithm performance to a variation measure with respect to the temporal distribution shift of the covariates. We also discuss conditions under which a better regret is achievable and demonstrate the proposed algorithms' performance with numerical experiments.

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