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Optimal Dynamic Pricing for Perishable Assets with Nonhomogeneous Demand

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  • Wen Zhao

    (Mechanical and Industrial Engineering Department, University of Illinois at Urbana-Champaign, Urbana, Illinois 61801)

  • Yu-Sheng Zheng

    (Operations and Information Management Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6366)

Abstract

We consider a dynamic pricing model for selling a given stock of a perishable product over a finite time horizon. Customers, whose reservation price distribution changes over time, arrive according to a nonhomogeneous Poisson process. We show that at any given time, the optimal price decreases with inventory. We also identify a sufficient condition under which the optimal price decreases over time for a given inventory level. This sufficient condition requires that the willingness of a customer to pay a premium for the product does not increase over time. In addition to shedding managerial insight, these structural properties enable efficient computation of the optimal policy. Numerical studies are conducted to show the revenue impact of dynamic price policies. Price changes are set to compensate for statistical fluctuations of demand and to respond to shifts of the reservation price. For the former, our examples show that using optimal dynamic optimal policies achieves 2.4--7.3% revenue improvement over the optimal single price policy. For the latter, the revenue increase can be as high as 100%. These results explain why yield management has become so essential to fashion retailing and travel service industries.

Suggested Citation

  • Wen Zhao & Yu-Sheng Zheng, 2000. "Optimal Dynamic Pricing for Perishable Assets with Nonhomogeneous Demand," Management Science, INFORMS, vol. 46(3), pages 375-388, March.
    • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:3:p:375-388
    DOI: 10.1287/mnsc.46.3.375.12063
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    References listed on IDEAS

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