A two‐stage bid‐price control for make‐to‐order revenue management

A two‐stage bid‐price control for make‐to‐order revenue management

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Article ID: iaor20118740
Volume: 39
Issue: 5
Start Page Number: 1021
End Page Number: 1032
Publication Date: May 2012
Journal: Computers and Operations Research
Authors: , , ,
Keywords: demand, neural networks
Abstract:

Capacity control implementations in make‐to‐order (MTO) revenue management typically are based on bid‐prices, which are used to approximate the opportunity cost of accepting a customer request. However, in the face of stochastic demand, this approximation becomes less accurate and the performance of bid‐prices may deteriorate. To address this problem, we examine the informational dynamics inherent in MTO capacity control problems and propose a two‐stage capacity control approach based on bid‐price updates. Updating is realized with neural networks, which are applied to adjust the selection criteria during the booking period with respect to online demand information. Not only is the resulting contribution margin positively influenced by the update, but also the downside risk of performing worse than a naive first‐come‐first‐served policy. Results from computational experiments show that the proposed approach dominates traditional revenue management methods like randomized linear programming with and without resolving in expected contribution margin as well as in risk.

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