Dynamic bid prices in revenue management

Dynamic bid prices in revenue management

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Article ID: iaor20082537
Country: United States
Volume: 55
Issue: 4
Start Page Number: 647
End Page Number: 661
Publication Date: Jul 2007
Journal: Operations Research
Authors:
Keywords: programming: dynamic
Abstract:

We formally derive the standard deterministic linear program (LP) for bid-price control by making an affine functional approximation to the optimal dynamic programming value function. This affine functional approximation gives rise to a new LP that yields tighter bounds than the standard LP. Whereas the standard LP computes static bid prices, our LP computes a time trajectory of bid prices. We show that there exist dynamic bid prices, optimal for the LP, that are individually monotone with respect to time. We provide a column generation procedure for solving the LP within a desired optimality tolerance, and present numerical results on computational and economic performance.

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