Optimal Starting Times for End-of-Season Sales and Optimal Stopping Times for Promotional Fares

Youyi Feng and Guillermo Gallego
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Youyi Feng: Department of Industrial Engineering and Operational Research, Columbia University, New York, New York 10027
Guillermo Gallego: Department of Industrial Engineering and Operational Research, Columbia University, New York, New York 10027

Management Science, 1995, vol. 41, issue 8, 1371-1391

Abstract: Many industries face the problem of selling a fixed stock of items over a finite horizon. These industries include airlines selling seats before planes depart, hotels renting rooms before midnight, theaters selling seats before curtain time, and retailers selling seasonal goods such as air-conditioners or winter coats before the end of the season. Given a fixed number of seats, rooms, or coats, the objective for these industries is to maximize revenues in excess of salvage value. When demand is price sensitive and stochastic, pricing is an effective tool to maximize revenues. In this paper we address the problem of deciding the optimal timing of a single price change from a given initial price to either a given lower or higher second price. Under mild conditions, we show that it is optimal to decrease (resp., to increase) the initial price as soon as the time-to-go falls below (resp., above) a time threshold that depends on the number of yet unsold items.

Keywords: dynamic pricing; yield management; stopping times; intensity control; martingales; finite horizon; optimal policies (search for similar items in EconPapers)
Date: 1995
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