Data driven pricing

In this book, we develop a pricing strategy that enables a firm to learn the behavior of its customers as well as optimize its profit in a monopolistic setting. The single product case as well as the multi product case are considered under different parametric forms of demand, whose parameters are unknown to the manager. For the linear demand case in the single product setting, our main contribution is an algorithm that guarantees almost sure convergence of the estimated demand parameters to the true parameters. Moreover, the pricing strategy is also asymptotically optimal. Simulations are run to study the sensitivity to different parameters. Using our results on the single product case, we extend the approach to the multi product case with linear demand. The pricing strategy we introduce is easy to implement and guarantees not only learning of the demand parameters but also maximization of the profit. Finally, other parametric forms of the demand are considered. A heuristic that can be used for many parametric forms of the demand is introduced, and is shown to have good performance in practice.