Pricing and Revenue Management: The Value of Coordination

Ayşe Kocabıyıkoğlu (), Ioana Popescu () and Catalina Stefanescu ()
Additional contact information
Ayşe Kocabıyıkoğlu: Department of Management, Bilkent University, Bilkent, Ankara 06800, Turkey
Ioana Popescu: Decision Sciences Area, INSEAD, Singapore 138676
Catalina Stefanescu: European School of Management and Technology, 10178 Berlin, Germany

Management Science, 2014, vol. 60, issue 3, 730-752

Abstract: The integration of systems for pricing and revenue management must trade off potential revenue gains against significant practical and technical challenges. This dilemma motivates us to investigate the value of coordinating decisions on prices and capacity allocation in a stylized setting. We propose two pairs of sequential policies for making static decisions---on pricing and revenue management---that differ in their degree of integration (hierarchical versus coordinated) and their pricing inputs (deterministic versus stochastic). For a large class of stochastic, price-dependent demand models, we prove that these four heuristics admit tractable solutions satisfying intuitive sensitivity properties. We further evaluate numerically the performance of these policies relative to a fully coordinated model, which is generally intractable. We find it interesting that near-optimal performance is usually achieved by a simple hierarchical policy that sets prices first, based on a nonnested stochastic model, and then uses these prices to optimize nested capacity allocation. This tractable policy largely outperforms its counterpart based on a deterministic pricing model. Jointly optimizing price and allocation decisions for the high-end segment improves performance, but the largest revenue benefits stem from adjusting prices to account for demand risk. This paper was accepted by Yossi Aviv, operations management.

Keywords: revenue management; pricing; coordination; price-sensitive stochastic demand; hierarchical policies; lost sales rate elasticity (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1782 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:3:p:730-752

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().