Privacy-Preserving Personalized Revenue Management

Abstract

This paper examines how data-driven personalized decisions can be made while preserving consumer privacy. Our setting is one in which the firm chooses a personalized price based on each new customer’s vector of individual features; the true set of individual demand-generating parameters is unknown to the firm and so must be estimated from historical data. We extend the existing personalized pricing framework by requiring also that the firm’s pricing policy preserve consumer privacy, or (formally) that it be differentially private: an industry standard for privacy preservation. We develop privacy-preserving personalized pricing algorithms and show that they achieve near-optimal revenue by deriving theoretical (upper and lower) performance bounds. Our analyses further suggest that, if the firm possesses a sufficient amount of historical data, then it can achieve a certain level of differential privacy almost “for free.” That is, the revenue loss due to privacy preservation is of smaller order than that due to estimation. We confirm our theoretical findings in a series of numerical experiments based on synthetically generated and online auto lending (CPRM-12-001) data sets. Finally, motivated by practical considerations, we also extend our algorithms and findings to a variety of alternative settings, including multiproduct pricing with substitution effect, discrete feasible price set, categorical sensitive features, and personalized assortment optimization. This paper was accepted by Vishal Gaur, operations management. Funding: R. Momot acknowledges financial support from the HEC Paris Foundation and the Agence Nationale de la Recherche (French National Research Agency) “Investissements d’Avenir” [Grant LabEx Ecodec/ANR-11-LABX-0047] during the initial stages of this project. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4925 .