The Stochastic Knapsack Revisited: Switch-Over Policies and Dynamic Pricing

Grace Y. Lin (), Yingdong Lu () and David D. Yao ()
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Grace Y. Lin: IBM Corporation, Yorktown Heights, New York 10598
Yingdong Lu: IBM Corporation, Yorktown Heights, New York 10598
David D. Yao: Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027

Operations Research, 2008, vol. 56, issue 4, 945-957

Abstract: The stochastic knapsack has been used as a model in wide-ranging applications from dynamic resource allocation to admission control in telecommunication. In recent years, a variation of the model has become a basic tool in studying problems that arise in revenue management and dynamic/flexible pricing, and it is in this context that our study is undertaken. Based on a dynamic programming formulation and associated properties of the value function, we study in this paper a class of control that we call switch-over policies---start by accepting only orders of the highest price, and switch to including lower prices as time goes by, with the switch-over times optimally decided via convex programming. We establish the asymptotic optimality of the switch-over policy, and develop pricing models based on this policy to optimize the price reductions over the decision horizon.

Keywords: revenue management; dynamic programming (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (10)

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