Article ID: | iaor20081296 |
Country: | United States |
Volume: | 55 |
Issue: | 1 |
Start Page Number: | 75 |
End Page Number: | 97 |
Publication Date: | Jan 2007 |
Journal: | Operations Research |
Authors: | McGill Jeff, Levin Yuri, Nediak Mikhail |
Keywords: | programming: nonlinear, inventory, marketing, programming: dynamic |
We present a new model for revenue management of product sales that incorporates both dynamic pricing and a price guarantee. The guarantee provides customers with compensation if, prior to a fixed future date, the price of the product drops below a level specified at the time of purchase. We consider the problem of simultaneously determining optimal dynamic price and guarantee policies for items from a fixed stock when demand depends both on the price and on the parameters of the price guarantee. The model can be used for pricing any items with limited availability over a fixed time horizon. We formulate this model as a discrete-time optimal control problem, prove the existence of its optimal solution, explore some of the structural properties of the solution, present lower-bounding heuristics for solving the problem, and report numerical results.