Risk minimising strategies for revenue management problems with target values

Matthias Koenig and Joern Meissner
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Matthias Koenig: Bielefeld University of Applied Sciences, Minden, Germany

Journal of the Operational Research Society, 2016, vol. 67, issue 3, 402-411

Abstract: Consider a risk-averse decision maker in the setting of a single-leg dynamic revenue management problem with revenue controlled by limiting capacity for a fixed set of prices. Instead of focussing on maximising the expected revenue, the decision maker has the main objective of minimising the risk of failing to achieve a given target revenue. Interpreting the revenue management problem in the framework of finite Markov decision processes, we augment the state space of the risk-neutral problem definition and change the objective function to the probability of failing a certain specified target revenue. This enables us to obtain a dynamic programming solution that generates the policy minimising the risk of not attaining this target revenue. We compare this solution with recently proposed risk-sensitive policies in a numerical study and discuss advantages and limitations.

Date: 2016
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Working Paper: Risk Minimizing Strategies for Revenue Management Problems with Target Values (2009)
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