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Risk in Revenue Management and Dynamic Pricing

Author

Listed:
  • Yuri Levin

    (School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6)

  • Jeff McGill

    (School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6)

  • Mikhail Nediak

    (School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6)

Abstract

We present a new model for optimal dynamic pricing of perishable services or products that incorporates a simple risk measure permitting control of the probability that total revenues fall below a minimum acceptable level. The formulation assumes that sales must occur within a finite time period, that there is a finite---possibly large---set of available prices, and that demand follows a price-dependent, nonhomogeneous Poisson process. This model is particularly appropriate for applications in which attainment of a revenue target is an important consideration for managers; for example, in event management, in seasonal clearance of high-value items, or for business subunits operating under performance targets. We formulate the model as a continuous-time optimal control problem, obtain optimality conditions, explore structural properties of the solution, and report numerical results on problems of realistic size.

Suggested Citation

  • Yuri Levin & Jeff McGill & Mikhail Nediak, 2008. "Risk in Revenue Management and Dynamic Pricing," Operations Research, INFORMS, vol. 56(2), pages 326-343, April.
    • Handle: RePEc:inm:oropre:v:56:y:2008:i:2:p:326-343
    DOI: 10.1287/opre.1070.0438
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    References listed on IDEAS

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