Dynamic Pricing and Advertising with Demand Learning

Abstract: We consider a novel pricing and advertising framework, where a seller not only sets product price but also designs flexible 'advertising schemes' to influence customers' valuation of the product. We impose no structural restriction on the seller's feasible advertising strategies and allow her to advertise the product by disclosing or concealing any information. Following the literature in information design, this fully flexible advertising can be modeled as the seller being able to choose any information policy that signals the product quality/characteristic to the customers. Customers observe the advertising signal and infer a Bayesian belief over the products. We aim to investigate two questions in this work: (1) What is the value of advertising? To what extent can advertising enhance a seller's revenue? (2) Without any apriori knowledge of the customers' demand function, how can a seller adaptively learn and optimize both pricing and advertising strategies using past purchase responses? To study the first question, we introduce and study the value of advertising - a revenue gap between using advertising vs not advertising, and we provide a crisp tight characterization for this notion for a broad family of problems. For the second question, we study the seller's dynamic pricing and advertising problem with demand uncertainty. Our main result for this question is a computationally efficient online algorithm that achieves an optimal $O(T^{2/3}(m\log T)^{1/3})$ regret rate when the valuation function is linear in the product quality. Here $m$ is the cardinality of the discrete product quality domain and $T$ is the time horizon. This result requires some mild regularity assumptions on the valuation function, but no Lipschitz or smoothness assumption on the customers' demand function. We also obtain several improved results for the widely considered special case of additive valuations.