Dynamic Pricing with Online Reviews

This paper investigates how the presence of product reviews can help inform a dynamic-pricing monopolist. A salient feature of our problem is that the customers' willingness-to-pay, and hence the demand function, evolves over time in conjunction with the dynamics of the average rating generated by online reviews. The monopolist strives to maximize its total expected revenue over a finite horizon by adjusting prices in response to the evolving review dynamics. To formulate the problem in tractable form, we study a fluid model which serves as a good approximation of the system dynamics when the volume of sales is large. This formulation lends itself to key structural insights, which are leveraged to design a well-performing dynamic pricing policy for the underlying revenue maximization problem. The proposed policy admits a closed-form expression for price and its performance is near-optimal in a suitable asymptotic sense. We illustrate the effectiveness of the proposed policy via simulation and counterfactual analysis in an online marketplace.