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Dynamic Pricing Strategies for Multi-Product Revenue Management Problems

Constantinos Maglaras and Joern Meissner
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Constantinos Maglaras: Graduate School of Business, Columbia University

No MRG/0002, Working Papers from Department of Management Science, Lancaster University

Abstract: Consider a firm that owns a fixed capacity of a resource that is consumed in the production or delivery of multiple products. The firm's problem is to maximize its total expected revenues over a finite horizon either by choosing a dynamic pricing strategy for each product, or, if prices are fixed, by selecting a dynamic rule that controls the allocation of capacity to requests for the different products. This paper shows how these well-studied revenue management problems can be reduced to a common formulation where the firm controls the aggregate rate at which all products jointly consume resource capacity. Product-level controls are then chosen to maximize the instantaneous revenues subject to the constraint that they jointly consume capacity at the desired rate. This highlights the common structure of these two problems, and in some cases leads to algorithmic simplifications through the reduction in the control dimension of the associated optimization problems. In addition, we show that this reduction leads to a closed-form solutions of the associated deterministic (fluid) formulation of these problems, which, in turn, suggest several natural static and dynamic pricing heuristics that we analyze asymptotically and through an extensive numerical study. In the context of the former, we show that "resolving" the fluid heuristic achieves asymptotically optimal performance under fluid scaling.

Keywords: revenue management; dynamic pricing; capacity controls; fluid approximations; efficient frontier (search for similar items in EconPapers)
JEL-codes: C61 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2003-07, Revised 2005-11
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Published in Manufacturing and Service Operations Management (MSOM) Vol 8, No 2 (Spring 2006), pp 136-148.

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