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Risk Minimizing Strategies for Revenue Management Problems with Target Values

  • Matthias Koenig

    (Department of Management Science, Lancaster University Management School)

  • Joern Meissner

    (Department of Management Science, Lancaster University Management School)

Consider a risk-averse decision maker in the setting of a single-leg dynamic revenue management problem with revenue controlled by limiting capacity for a fixed set of prices. Instead of focussing on maximizing the expected revenue, the decision maker has the main objective of minimizing the risk of failing to achieve a given target revenue. Interpreting the revenue management problem in the framework of finite Markov decision processes, we augment the state space of the risk-neutral problem definition and change the objective function to the probability of failing a certain specified target revenue. This enables us to obtain a dynamic programming solution which generates the policy minimizing the risk of not attaining this target revenue. We compare this solution with recently proposed risk-sensitive policies in a numerical study and discuss advantages and limitations.

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Paper provided by Department of Management Science, Lancaster University in its series Working Papers with number MRG/0015.

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Length: 24 pages
Date of creation: Nov 2009
Date of revision: Oct 2014
Handle: RePEc:lms:mansci:mrg-0015
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