Risk in Revenue Management and Dynamic Pricing

We present a new model for optimal dynamic pricing of perishable services or products that incorporates a simple risk measure permitting control of the probability that total revenues fall below a minimum acceptable level. The formulation assumes that sales must occur within a finite time period, th...

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Bibliographic Details
Published in:Operations research Vol. 56; no. 2; pp. 326 - 343
Main Authors: Levin, Yuri, McGill, Jeff, Nediak, Mikhail
Format: Journal Article
Language:English
Published: Linthicum, MD INFORMS 01.03.2008
Institute for Operations Research and the Management Sciences
Subjects:
Adjoints
Airlines
applications
Applied sciences
Approximation
Computer science; control theory; systems
Control theory. Systems
dynamic programming/optimal control
Exact sciences and technology
Firm modelling
Forecasts and trends
Inventories
Inventory control, production control. Distribution
inventory/production
Management
marketing/pricing
Modeling
Operational research and scientific management
Operational research. Management science
Operations research
Optimal control
Optimal policy
Perishable goods
perishable/aging items
Perishables
Poisson distribution
Pricing policies
probability
Reservation prices
Revenue
Risk
Risk aversion
Risk theory. Actuarial science
stochastic model applications
Stochastic models
Studies
uncertainty
United States
Performance evaluation
Stochastic model
Continuous time
Modeling
Poisson process
Marketing
inventory/production: perishable/aging items
Business process
Uncertain system
Sales
Continuous control
uncertainty; dynamic programming/optimal control: applications; probability: stochastic model applications
Pricing
Inventory control
Dynamic programming
Dynamic model
Probabilistic approach
Event management
Ageing
Return rate
Risk analysis
Real time
Perishable item
High value
Business model
Optimal control
Optimality condition
Optimality criterion
Tariffication
marketing/pricing
Time optimal control
Risk management
ISSN:0030-364X, 1526-5463
Online Access:Get full text
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Description
Summary:We present a new model for optimal dynamic pricing of perishable services or products that incorporates a simple risk measure permitting control of the probability that total revenues fall below a minimum acceptable level. The formulation assumes that sales must occur within a finite time period, that there is a finite-possibly large-set of available prices, and that demand follows a price-dependent, nonhomogeneous Poisson process. This model is particularly appropriate for applications in which attainment of a revenue target is an important consideration for managers; for example, in event management, in seasonal clearance of high-value items, or for business subunits operating under performance targets. We formulate the model as a continuous-time optimal control problem, obtain optimality conditions, explore structural properties of the solution, and report numerical results on problems of realistic size.
Bibliography:SourceType-Scholarly Journals-1
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content type line 14
ISSN:0030-364X
1526-5463
DOI:10.1287/opre.1070.0438