Modeling high demand variance in dynamic programming

Modeling high demand variance in dynamic programming

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Article ID: iaor200943715
Country: United Kingdom
Volume: 5
Issue: 2
Start Page Number: 94
End Page Number: 101
Publication Date: Jul 2006
Journal: Journal of Revenue and Pricing Management
Authors:
Keywords: programming: dynamic
Abstract:

Practitioners sometimes show reluctance to apply DP models in Revenue Management citing difficulty in modeling high–variance, real–life customer demand. We propose a method to address that issue by suitably increasing variance in a popular Poisson demand model and then slightly generalizing the DP formulation while keeping desired structural properties intact. We include numerical examples for a discrete–time approximation to Poisson–distributed demand.

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