Equivalence of Piecewise-Linear Approximation and Lagrangian Relaxation for Network Revenue Management

Sumit Kunnumkal and Kalyan Talluri

No 608, Working Papers from Barcelona School of Economics

Abstract: The network revenue management (RM) problem arises in airline, hotel, media, and other industries where the sale products use multiple resources. It can be formulated as a stochastic dynamic program but the dynamic program is computationally intractable because of an exponentially large state space, and a number of heuristics have been proposed to approximate it. Notable amongst these (both for their revenue performance, as well as their theoretically sound basis) are approximate dynamic programming methods that approximate the value function by basis functions (both affine functions as well as piecewise-linear functions have been proposed for network RM) and decomposition methods that relax the constraints of the dynamic program to solve simpler dynamic programs (such as the Lagrangian relaxation methods). In this paper we show that these two seemingly distinct approaches coincide for the network RM dynamic program, i.e., the piecewise-linear approximation method and the Lagrangian relaxation method are one and the same.

Keywords: network revenue management; linear programming; approximate dynamic programming; Lagrangian relaxation methods (search for similar items in EconPapers)
JEL-codes: C61 L83 L93 M11 (search for similar items in EconPapers)
Date: 2015-09
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Citations: View citations in EconPapers (5)

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