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Dynamic pricing and revenue management process in Internet retailing under uncertainty: An integrated real options approach


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  • Tsai, Wen-Hsien
  • Hung, Shih-Jieh
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    Competition and demand volatility often cause modern enterprises to be confronted by uncertain environments. When a firm manages revenue in such competitive and risky environments, the optimization of pricing and capacity allocation, subject to a fixed time and capacity, becomes a complicated problem. Many previous papers concerning revenue management (RM) and pricing require that the firm possesses the ability to know the demand curve (or demand distribution) and set prices on it to maximize profits. However, this assumption may not be the case in some industries. Therefore, this paper focuses on the dynamic lead indicators rather than assumptive lag indicators to establish a concise and flexible decision model for practical use. This paper provides an integrated real options (IRO) approach with analytic hierarchy process (AHP) for the auction RM problem under competitive/dynamic pricing and revenue uncertainty in Internet retailing. A numerical example is also presented to illustrate that the IRO approach can generate better decisions than the naI¨ve (or risk unawareness) approach in revenue quality of safety and profitability. The new perspective and approach proposed by this paper can be extended to other RM fields whenever both profitability and risk are critical to decision making.

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    Article provided by Elsevier in its journal Omega.

    Volume (Year): 37 (2009)
    Issue (Month): 2 (April)
    Pages: 471-481

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    Handle: RePEc:eee:jomega:v:37:y:2009:i:2:p:471-481

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    Keywords: Revenue management Dynamic pricing Competition Uncertainty Internet retailing Integrated real options approach Analytic hierarchy process;


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    6. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 620-38, June.
    7. Forbes, William, 2006. "The boys in the bubble: Internet entrepreneurs and stock market value," Omega, Elsevier, Elsevier, vol. 34(5), pages 439-447, October.
    8. Schniederjans, Marc J. & Garvin, Tim, 1997. "Using the analytic hierarchy process and multi-objective programming for the selection of cost drivers in activity-based costing," European Journal of Operational Research, Elsevier, Elsevier, vol. 100(1), pages 72-80, July.
    9. Bodily, S. E. & Weatherford, L. R., 1995. "Perishable-asset revenue management: Generic and multiple-price yield management with diversion," Omega, Elsevier, Elsevier, vol. 23(2), pages 173-185, April.
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    12. Yao, Dong-Qing & Liu, John J., 2005. "Competitive pricing of mixed retail and e-tail distribution channels," Omega, Elsevier, Elsevier, vol. 33(3), pages 235-247, June.
    13. Gabriel Bitran & René Caldentey, 2003. "An Overview of Pricing Models for Revenue Management," Manufacturing & Service Operations Management, INFORMS, INFORMS, vol. 5(3), pages 203-229, August.
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    Cited by:
    1. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, Elsevier, vol. 41(2), pages 236-249.
    2. Rana, Rupal & Oliveira, Fernando S., 2014. "Real-time dynamic pricing in a non-stationary environment using model-free reinforcement learning," Omega, Elsevier, Elsevier, vol. 47(C), pages 116-126.
    3. Zhao, Li & Tian, Peng & Xiangyong Li, 2012. "Dynamic pricing in the presence of consumer inertia," Omega, Elsevier, Elsevier, vol. 40(2), pages 137-148, April.
    4. Adkins, Roger & Paxson, Dean, 2013. "Deterministic models for premature and postponed replacement," Omega, Elsevier, Elsevier, vol. 41(6), pages 1008-1019.
    5. Choi, Tsan-Ming & Chow, Pui-Sze & Xiao, Tiaojun, 2012. "Electronic price-testing scheme for fashion retailing with information updating," International Journal of Production Economics, Elsevier, Elsevier, vol. 140(1), pages 396-406.
    6. Papier, Felix & Thonemann, Ulrich W., 2011. "Capacity rationing in rental systems with two customer classes and batch arrivals," Omega, Elsevier, Elsevier, vol. 39(1), pages 73-85, January.


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