Regime-Dependent Approximations for the Single-Item Dynamic Pricing Problem

Optimizing Prices for Viral Demand and Scarcity Dynamic pricing models often assume that inventory and demand scale proportionally, but this “fluid” view breaks down when products go viral. In “Regime-Dependent Approximations for the Single-Item Dynamic Pricing Problem,” Tarek Abdallah and Josh Reed investigate market extremes, specifically the “large market regime,” where inventory is scarce relative to surging demand. Their analysis reveals critical pitfalls in common heuristic approaches. The authors demonstrate that intuitive “price high and wait” policies are ineffective and, remarkably, that fluid static policies are not even first-order optimal in this context. Instead, they establish that a dynamic run-out-rate policy is essential to achieve both first- and second-order asymptotic optimality. Leveraging Extreme Value Theory, this research provides a robust framework for managing severe supply-demand imbalances, ensuring that firms can effectively capture value in inventory-constrained environments.