Simple Policies for Dynamic Pricing with Imperfect Forecasts

We consider the ‘classical’ single product dynamic pricing problem allowing the ‘scale’ of demand intensity to be modulated by an an exogenous ‘market size’ stochastic process. This is a natural model of dynamically changing market conditions. We show that for a broad family of Gaussian market size processes, simple dynamic pricing rules that are essentially agnostic to the specification of this market size process perform provably well. The pricing policies we develop are shown to compensate for forecast imperfections (or a lack of forecast information altogether) by frequent re-optimization and re-estimation of the ‘instantaneous’ market size.