Technical Note—Static Pricing: Universal Guarantees for Reusable Resources

Omar Besbes (), Adam N. Elmachtoub () and Yunjie Sun ()
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Omar Besbes: Columbia Business School, New York, New York 10027
Adam N. Elmachtoub: Department of Industrial Engineering and Operations Research and Data Science Institute, Columbia University, New York, New York 10027
Yunjie Sun: Department of Industrial Engineering and Operations Research, Columbia University, New York, New York 10027

Operations Research, 2022, vol. 70, issue 2, 1143-1152

Abstract: We consider a fundamental pricing model in which a fixed number of units of a reusable resource are used to serve customers. Customers arrive to the system according to a stochastic process and, upon arrival, decide whether to purchase the service, depending on their willingness to pay and the current price. The service time during which the resource is used by the customer is stochastic, and the firm may incur a service cost. This model represents various markets for reusable resources, such as cloud computing, shared vehicles, rotable parts, and hotel rooms. In the present paper, we analyze this pricing problem when the firm attempts to maximize a weighted combination of three central metrics: profit, market share, and service level. Under Poisson arrivals, exponential service times, and standard assumptions on the willingness-to-pay distribution, we establish a series of results that characterize the performance of static pricing in such environments. In particular, although an optimal policy is fully dynamic in such a context, we prove that a static pricing policy simultaneously guarantees 78.9% of the profit, market share, and service level from the optimal policy. Notably, this result holds for any service rate and number of units the firm operates. Our proof technique relies on a judicious construction of a static price that is derived directly from the optimal dynamic pricing policy. In the special case in which there are two units and the induced demand is linear, we also prove that the static policy guarantees 95.5% of the profit from the optimal policy. Our numerical findings on a large test bed of instances suggest that the latter result is quite indicative of the profit obtained by the static pricing policy across all parameters.

Keywords: Optimization; reusable resources; dynamic pricing; static pricing; approximation algorithm (search for similar items in EconPapers)
Date: 2022
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