A Monopolistic and Oligopolistic Stochastic Flow Revenue Management Model

Xiaowei Xu () and Wallace J. Hopp ()
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Xiaowei Xu: Department of Management Science and Information Systems, Rutgers University, The State University of New Jersey, Newark, New Jersey 07102
Wallace J. Hopp: Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208

Operations Research, 2006, vol. 54, issue 6, 1098-1109

Abstract: This paper studies a one-shot inventory replenishment problem with dynamic pricing. The customer arrival rate is assumed to follow a geometric Brownian motion. Homogeneous customers have an isoelastic demand function and do not behave strategically. We find a closed-form optimal pricing policy, which utilizes current demand information. Under this pricing policy the inventory trajectory is deterministic, and a retailer sells all inventory. We show that dynamic pricing coordinated with the inventory decision achieves significantly higher profits than does static pricing. Furthermore, under oligopolistic competition we establish a weak perfect Bayesian equilibrium for the price and inventory replenishment game. We find the pricing equilibrium to be cooperative even in a noncooperative environment, but that inventory competition results in overstock and damages profits. Finally, we examine the trade-off between dynamic pricing and price precommitment and find that flexible pricing is still beneficial, provided competition is not too intense.

Keywords: differential games; dynamic pricing; geometric Brownian motion; martingales; revenue management (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (18)

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