IDEAS home Printed from https://ideas.repec.org/a/inm/ortrsc/v51y2017i4p1046-1062.html
   My bibliography  Save this article

Dynamic Programming Decomposition for Choice-Based Revenue Management with Flexible Products

Author

Listed:
  • Sebastian Koch

    (University of Augsburg, 86159 Augsburg, Germany)

  • Jochen Gönsch

    (Mercator School of Management, University of Duisburg–Essen, 47057 Duisburg, Germany)

  • Claudius Steinhardt

    (Bundeswehr University Munich, 85577 Neubiberg, Germany)

Abstract

We reconsider the stochastic dynamic program of revenue management with flexible products and customer choice behavior as proposed by Gallego et al. [Gallego G, Iyengar G, Phillips RL, Dubey A (2004) Managing flexible products on a network. Working paper, Columbia University, New York]. In the scientific literature on revenue management, as well as in practice, the prevailing strategy to operationalize dynamic programs is to decompose the network by resources and solve the resulting one-dimensional problems. However, to date, these dynamic programming decomposition approaches have not been applicable to problems with flexible products, because sold flexible products must be included in the dynamic program’s state space and do not correspond directly to resources. In this paper, we contribute to the existing research by presenting a general approach to operationalizing revenue management with flexible products and customer choice in a dynamic programming environment. In particular, we reformulate the original dynamic program by means of Fourier–Motzkin elimination to obtain an equivalent dynamic program with a standard resource-based state space. This reformulation allows the application of dynamic programming decomposition approaches. Numerical experiments show that the new approach has a superior revenue performance and that its average revenues are close to the upper bound on the optimal expected revenue from the choice-based deterministic linear program. Moreover, our reformulation improves the revenues by up to 8% compared to an extended variant of a standard choice-based approach that immediately assigns flexible products after their sale.

Suggested Citation

  • Sebastian Koch & Jochen Gönsch & Claudius Steinhardt, 2017. "Dynamic Programming Decomposition for Choice-Based Revenue Management with Flexible Products," Transportation Science, INFORMS, vol. 51(4), pages 1046-1062, November.
  • Handle: RePEc:inm:ortrsc:v:51:y:2017:i:4:p:1046-1062
    DOI: 10.1287/trsc.2017.0743
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/trsc.2017.0743
    Download Restriction: no

    File URL: https://libkey.io/10.1287/trsc.2017.0743?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Daniel Adelman, 2007. "Dynamic Bid Prices in Revenue Management," Operations Research, INFORMS, vol. 55(4), pages 647-661, August.
    2. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, September.
    3. Dimitris Bertsimas & Ioana Popescu, 2003. "Revenue Management in a Dynamic Network Environment," Transportation Science, INFORMS, vol. 37(3), pages 257-277, August.
    4. Alexander Erdelyi & Huseyin Topaloglu, 2010. "A Dynamic Programming Decomposition Method for Making Overbooking Decisions Over an Airline Network," INFORMS Journal on Computing, INFORMS, vol. 22(3), pages 443-456, August.
    5. Fink, Andreas & Reiners, Torsten, 2006. "Modeling and solving the short-term car rental logistics problem," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 42(4), pages 272-292, July.
    6. Fred Glover & Randy Glover & Joe Lorenzo & Claude McMillan, 1982. "The Passenger-Mix Problem in the Scheduled Airlines," Interfaces, INFORMS, vol. 12(3), pages 73-80, June.
    7. Tak C. Lee & Marvin Hersh, 1993. "A Model for Dynamic Airline Seat Inventory Control with Multiple Seat Bookings," Transportation Science, INFORMS, vol. 27(3), pages 252-265, August.
    8. Dan Zhang, 2011. "An Improved Dynamic Programming Decomposition Approach for Network Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 35-52, April.
    9. Guillermo Gallego & Richard Ratliff & Sergey Shebalov, 2015. "A General Attraction Model and Sales-Based Linear Program for Network Revenue Management Under Customer Choice," Operations Research, INFORMS, vol. 63(1), pages 212-232, February.
    10. Ş. İlker Birbil & J. B. G. Frenk & Joaquim A. S. Gromicho & Shuzhong Zhang, 2014. "A Network Airline Revenue Management Framework Based on Decomposition by Origins and Destinations," Transportation Science, INFORMS, vol. 48(3), pages 313-333, August.
    11. 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.
    12. Guillermo Gallego & Robert Phillips, 2004. "Revenue Management of Flexible Products," Manufacturing & Service Operations Management, INFORMS, vol. 6(4), pages 321-337, January.
    13. Robert A. Shumsky & Fuqiang Zhang, 2009. "Dynamic Capacity Management with Substitution," Operations Research, INFORMS, vol. 57(3), pages 671-684, June.
    14. James M. Davis & Guillermo Gallego & Huseyin Topaloglu, 2014. "Assortment Optimization Under Variants of the Nested Logit Model," Operations Research, INFORMS, vol. 62(2), pages 250-273, April.
    15. Kalyan Talluri & Garrett van Ryzin, 1998. "An Analysis of Bid-Price Controls for Network Revenue Management," Management Science, INFORMS, vol. 44(11-Part-1), pages 1577-1593, November.
    16. Chen, Shaoxiang & Gallego, Guillermo & Li, Michael Z.F. & Lin, Bing, 2010. "Optimal seat allocation for two-flight problems with a flexible demand segment," European Journal of Operational Research, Elsevier, vol. 201(3), pages 897-908, March.
    17. M. K. Geraghty & Ernest Johnson, 1997. "Revenue Management Saves National Car Rental," Interfaces, INFORMS, vol. 27(1), pages 107-127, February.
    18. 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.
    19. William C. Jordan & Stephen C. Graves, 1995. "Principles on the Benefits of Manufacturing Process Flexibility," Management Science, INFORMS, vol. 41(4), pages 577-594, April.
    20. Dan Zhang & Daniel Adelman, 2009. "An Approximate Dynamic Programming Approach to Network Revenue Management with Customer Choice," Transportation Science, INFORMS, vol. 43(3), pages 381-394, August.
    21. Peter P. Belobaba, 1989. "OR Practice—Application of a Probabilistic Decision Model to Airline Seat Inventory Control," Operations Research, INFORMS, vol. 37(2), pages 183-197, April.
    22. Chaoxu Tong & Huseyin Topaloglu, 2014. "On the Approximate Linear Programming Approach for Network Revenue Management Problems," INFORMS Journal on Computing, INFORMS, vol. 26(1), pages 121-134, February.
    23. William L. Cooper & Tito Homem-de-Mello, 2007. "Some Decomposition Methods for Revenue Management," Transportation Science, INFORMS, vol. 41(3), pages 332-353, August.
    24. Conrad J. Lautenbacher & Shaler Stidham, 1999. "The Underlying Markov Decision Process in the Single-Leg Airline Yield-Management Problem," Transportation Science, INFORMS, vol. 33(2), pages 136-146, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Strauss, Arne & Gülpınar, Nalan & Zheng, Yijun, 2021. "Dynamic pricing of flexible time slots for attended home delivery," European Journal of Operational Research, Elsevier, vol. 294(3), pages 1022-1041.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Syed Asif Raza & Rafi Ashrafi & Ali Akgunduz, 2020. "A bibliometric analysis of revenue management in airline industry," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(6), pages 436-465, December.
    2. Ş. İlker Birbil & J. B. G. Frenk & Joaquim A. S. Gromicho & Shuzhong Zhang, 2014. "A Network Airline Revenue Management Framework Based on Decomposition by Origins and Destinations," Transportation Science, INFORMS, vol. 48(3), pages 313-333, August.
    3. Klein, Robert & Koch, Sebastian & Steinhardt, Claudius & Strauss, Arne K., 2020. "A review of revenue management: Recent generalizations and advances in industry applications," European Journal of Operational Research, Elsevier, vol. 284(2), pages 397-412.
    4. Mika Sumida & Huseyin Topaloglu, 2019. "An Approximation Algorithm for Capacity Allocation Over a Single Flight Leg with Fare-Locking," INFORMS Journal on Computing, INFORMS, vol. 31(1), pages 83-99, February.
    5. 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.
    6. Dan Zhang & Larry Weatherford, 2017. "Dynamic Pricing for Network Revenue Management: A New Approach and Application in the Hotel Industry," INFORMS Journal on Computing, INFORMS, vol. 29(1), pages 18-35, February.
    7. Strauss, Arne K. & Klein, Robert & Steinhardt, Claudius, 2018. "A review of choice-based revenue management: Theory and methods," European Journal of Operational Research, Elsevier, vol. 271(2), pages 375-387.
    8. Thomas W. M. Vossen & Dan Zhang, 2015. "Reductions of Approximate Linear Programs for Network Revenue Management," Operations Research, INFORMS, vol. 63(6), pages 1352-1371, December.
    9. Yuhang Ma & Paat Rusmevichientong & Mika Sumida & Huseyin Topaloglu, 2020. "An Approximation Algorithm for Network Revenue Management Under Nonstationary Arrivals," Operations Research, INFORMS, vol. 68(3), pages 834-855, May.
    10. Dan Zhang, 2011. "An Improved Dynamic Programming Decomposition Approach for Network Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 35-52, April.
    11. David Sayah, 2015. "Approximate Linear Programming in Network Revenue Management with Multiple Modes," Working Papers 1518, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    12. Chevalier, Philippe & Lamas, Alejandro & Lu, Liang & Mlinar, Tanja, 2015. "Revenue management for operations with urgent orders," European Journal of Operational Research, Elsevier, vol. 240(2), pages 476-487.
    13. Nicolas Houy & François Le Grand, 2015. "The Monte Carlo first-come-first-served heuristic for network revenue management," Working Papers halshs-01155698, HAL.
    14. 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.
    15. 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.
    16. Meissner, Joern & Strauss, Arne, 2012. "Improved bid prices for choice-based network revenue management," European Journal of Operational Research, Elsevier, vol. 217(2), pages 417-427.
    17. 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.
    18. Laumer, Simon & Barz, Christiane, 2023. "Reductions of non-separable approximate linear programs for network revenue management," European Journal of Operational Research, Elsevier, vol. 309(1), pages 252-270.
    19. William L. Cooper, 2002. "Asymptotic Behavior of an Allocation Policy for Revenue Management," Operations Research, INFORMS, vol. 50(4), pages 720-727, August.
    20. Sierag, D.D. & Koole, G.M. & van der Mei, R.D. & van der Rest, J.I. & Zwart, B., 2015. "Revenue management under customer choice behaviour with cancellations and overbooking," European Journal of Operational Research, Elsevier, vol. 246(1), pages 170-185.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ortrsc:v:51:y:2017:i:4:p:1046-1062. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.