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Integrated revenue management approaches for capacity control with planned upgrades


  • Steinhardt, Claudius
  • Gönsch, Jochen


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.

Suggested Citation

  • Steinhardt, Claudius & Gönsch, Jochen, 2012. "Integrated revenue management approaches for capacity control with planned upgrades," European Journal of Operational Research, Elsevier, vol. 223(2), pages 380-391.
  • Handle: RePEc:eee:ejores:v:223:y:2012:i:2:p:380-391
    DOI: 10.1016/j.ejor.2012.05.047

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    References listed on IDEAS

    1. 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).
    2. Kalyan Talluri, 2008. "On bounds for network revenue management," Economics Working Papers 1066, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2009.
    3. 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.
    4. 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.
    5. 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.
    6. Guillermo Gallego & Robert Phillips, 2004. "Revenue Management of Flexible Products," Manufacturing & Service Operations Management, INFORMS, vol. 6(4), pages 321-337, January.
    7. 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.
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    Cited by:

    1. Li, Tingting & Xie, Jinxing & Lu, Shengmin & Tang, Jiafu, 2016. "Duopoly game of callable products in airline revenue management," European Journal of Operational Research, Elsevier, vol. 254(3), pages 925-934.
    2. 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.
    3. Nicolas Houy & François Le Grand, 2015. "The Monte Carlo first-come-first-served heuristic for network revenue management," Working Papers halshs-01155698, HAL.
    4. repec:eee:jomega:v:71:y:2017:i:c:p:11-26 is not listed on IDEAS
    5. repec:eee:ejores:v:263:y:2017:i:2:p:337-348 is not listed on IDEAS
    6. Nicolas Houy & François Le Grand, 2015. "Financing and advising with (over)confident entrepreneurs : an experimental investigation," Working Papers 1514, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    7. Li, Dong & Pang, Zhan, 2017. "Dynamic booking control for car rental revenue management: A decomposition approach," European Journal of Operational Research, Elsevier, vol. 256(3), pages 850-867.
    8. Matzke, Andreas & Volling, Thomas & Spengler, Thomas S., 2016. "Upgrade auctions in build-to-order manufacturing with loss-averse customers," European Journal of Operational Research, Elsevier, vol. 250(2), pages 470-479.


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