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Optimal Policies of Yield Management with Multiple Predetermined Prices

Author

Listed:
  • Youyi Feng

    (National University of Singapore, Republic of Singapore 119260)

  • Baichun Xiao

    (Long Island University, C.W. Post, Brookville, New York 11548)

Abstract

It is a common practice for industries to price the same products at different levels. For example, airlines charge various fares for a common pool of seats. Seasonal products are sold at full or discount prices during different phases of the season. This article presents a model that reflects this yield management problem. The model assumes that (1) products are offered at multiple predetermined prices over time; (2) demand is price sensitive and obeys the Poisson process; and (3) price is allowed to change monotonically, i.e., either the markup or markdown policy is implemented. To maximize the expected revenue, management needs to determine the optimal times to switch between prices based on the remaining season and inventory. Major results in this research include (1) an exact solution for the continuous-time model; (2) piecewise concavity of the value function with respect to time and inventory; and (3) monotonicity of the optimal policy. The implementation of optimal policies is fairly facile because of the existence of threshold points embedded in the value function. The value function and time thresholds can be solved with a reasonable computation effort. Numerical examples are provided.

Suggested Citation

  • Youyi Feng & Baichun Xiao, 2000. "Optimal Policies of Yield Management with Multiple Predetermined Prices," Operations Research, INFORMS, vol. 48(2), pages 332-343, April.
    • Handle: RePEc:inm:oropre:v:48:y:2000:i:2:p:332-343
    DOI: 10.1287/opre.48.2.332.13373
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    References listed on IDEAS

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