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Integrated revenue management approaches for capacity control with planned upgrades

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  • Steinhardt, Claudius
  • Gönsch, Jochen
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    Abstract

    In many service industries, firms offer a portfolio of similar products based on different types of resources. Mismatches between demand and capacity can therefore often be managed by using product upgrades. Clearly, it is desirable to consider this possibility in the revenue management systems that are used to decide on the acceptance of requests. To incorporate upgrades, we build upon different dynamic programming formulations from the literature and gain several new structural insights that facilitate the control process under certain conditions. We then propose two dynamic programming decomposition approaches that extend the traditional decomposition for capacity control by simultaneously considering upgrades as well as capacity control decisions. While the first approach is specifically suited for the multi-day capacity control problem faced, for example, by hotels and car rental companies, the second one is more general and can be applied in arbitrary network revenue management settings that allow upgrading. Both approaches are formally derived and analytically related to each other. It is shown that they give tighter upper bounds on the optimal solution of the original dynamic program than the well-known deterministic linear program. Using data from a major car rental company, we perform computational experiments that show that the proposed approaches are tractable for real-world problem sizes and outperform those disaggregated, successive planning approaches that are used in revenue management practice today.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 223 (2012)
    Issue (Month): 2 ()
    Pages: 380-391

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    Handle: RePEc:eee:ejores:v:223:y:2012:i:2:p:380-391

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    Web page: http://www.elsevier.com/locate/eor

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    Keywords: Revenue management; Upgrades; Capacity control; Dynamic programming; Decomposition; Car rental;

    References

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    1. Qian Liu & Garrett van Ryzin, 2008. "On the Choice-Based Linear Programming Model for Network Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 10(2), pages 288-310, October.
    2. Alstrup, Jens & Boas, Soren & Madsen, Oli B. G. & Vidal, ReneVictor Valqui, 1986. "Booking policy for flights with two types of passengers," European Journal of Operational Research, Elsevier, vol. 27(3), pages 274-288, December.
    3. Meissner, Joern & Strauss, Arne, 2012. "Network revenue management with inventory-sensitive bid prices and customer choice," European Journal of Operational Research, Elsevier, vol. 216(2), pages 459-468.
    4. Kalyan Talluri, 2008. "On bounds for network revenue management," Economics Working Papers 1066, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2009.
    5. Guillermo Gallego & Robert Phillips, 2004. "Revenue Management of Flexible Products," Manufacturing & Service Operations Management, INFORMS, vol. 6(4), pages 321-337, January.
    6. Lang, Jan Christian, 2009. "Production and inventory management with substitutions," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 42531, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    7. Wen-Chyuan Chiang & Jason C.H. Chen & Xiaojing Xu, 2007. "An overview of research on revenue management: current issues and future research," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 1(1), pages 97-128.
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    Cited by:
    1. Gönsch, Jochen & Koch, Sebastian & Steinhardt, Claudius, 2014. "Revenue management with flexible products: The value of flexibility and its incorporation into DLP-based approaches," International Journal of Production Economics, Elsevier, vol. 153(C), pages 280-294.

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