Article ID: | iaor20082535 |
Country: | United States |
Volume: | 53 |
Issue: | 3 |
Start Page Number: | 390 |
End Page Number: | 407 |
Publication Date: | Mar 2007 |
Journal: | Management Science |
Authors: | Gans Noah, Savin Sergei |
Keywords: | programming: dynamic, service |
We consider a rental firm with two types of customers. Contract customers pay fixed, prenegotiated rental fees and expect a high quality of service. Walk-in customers have no contractual relations with the firm and are ‘shopping for price’. Given multiple contract and walk-in classes, the rental firm has to decide when to offer service to contract customers and what fees to charge walk-in customers for service. We formulate this rental management problem as a problem in stochastic control and characterize optimal policies for managing contract and walk-in customers. We also consider static, myopic controls that are simpler to implement, and we analytically establish conditions under which these policies perform optimally. Complementary numerical tests provide a sense of the range of systems for which myopic policies are effective.