Price Guarantees in Dynamic Pricing and Revenue Management

Yuri Levin (), Jeff McGill () and Mikhail Nediak ()
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Yuri Levin: School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6
Jeff McGill: School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6
Mikhail Nediak: School of Business, Queen’s University, Kingston, Ontario, Canada K7L 3N6

Operations Research, 2007, vol. 55, issue 1, 75-97

Abstract: We present a new model for revenue management of product sales that incorporates both dynamic pricing and a price guarantee. The guarantee provides customers with compensation if, prior to a fixed future date, the price of the product drops below a level specified at the time of purchase. We consider the problem of simultaneously determining optimal dynamic price and guarantee policies for items from a fixed stock when demand depends both on the price and on the parameters of the price guarantee. The model can be used for pricing any items with limited availability over a fixed time horizon. We formulate this model as a discrete-time optimal control problem, prove the existence of its optimal solution, explore some of the structural properties of the solution, present lower-bounding heuristics for solving the problem, and report numerical results.

Keywords: inventory/production; perishable/aging items; marketing/pricing; uncertainty; dynamic programming/optimal control; applications; probability; stochastic model applications; programming; nonlinear (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (25)

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