Risk in Revenue Management and Dynamic Pricing

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, 2008, vol. 56, issue 2, 326-343

Abstract: We present a new model for optimal dynamic pricing of perishable services or products that incorporates a simple risk measure permitting control of the probability that total revenues fall below a minimum acceptable level. The formulation assumes that sales must occur within a finite time period, that there is a finite---possibly large---set of available prices, and that demand follows a price-dependent, nonhomogeneous Poisson process. This model is particularly appropriate for applications in which attainment of a revenue target is an important consideration for managers; for example, in event management, in seasonal clearance of high-value items, or for business subunits operating under performance targets. We formulate the model as a continuous-time optimal control problem, obtain optimality conditions, explore structural properties of the solution, and report numerical results on problems of realistic size.

Keywords: inventory/production; perishable/aging items; marketing/pricing; uncertainty; dynamic programming/optimal control; applications; probability; stochastic model applications (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:56:y:2008:i:2:p:326-343

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