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Equivalence of piecewise-linear approximation and Lagrangian relaxation for network revenue management

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Abstract

The network revenue management (RM) problem arises in airline, hotel, media, and other industries where the sale products use multiple resources. It can be formulated as a stochastic dynamic program but the dynamic program is computationally intractable because of an exponentially large state space, and a number of heuristics have been proposed to approximate it. Notable amongst these -both for their revenue performance, as well as their theoretically sound basis- are approximate dynamic programming methods that approximate the value function by basis functions (both affine functions as well as piecewise-linear functions have been proposed for network RM) and decomposition methods that relax the constraints of the dynamic program to solve simpler dynamic programs (such as the Lagrangian relaxation methods). In this paper we show that these two seemingly distinct approaches coincide for the network RM dynamic program, i.e., the piecewise-linear approximation method and the Lagrangian relaxation method are one and the same.

Suggested Citation

  • Sumit Kunnumkal & Kalyan Talluri, 2011. "Equivalence of piecewise-linear approximation and Lagrangian relaxation for network revenue management," Economics Working Papers 1305, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2012.
  • Handle: RePEc:upf:upfgen:1305
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    1. 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.
    2. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
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    Keywords

    network revenue management; linear programming; approximate dynamic programming; Lagrangian relaxation methods;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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