Performance of an LP-Based Control for Revenue Management with Unknown Demand Parameters

Performance of an LP-Based Control for Revenue Management with Unknown Demand Parameters

0.00 Avg rating0 Votes
Article ID: iaor20164682
Volume: 63
Issue: 4
Start Page Number: 909
End Page Number: 915
Publication Date: Aug 2015
Journal: Operations Research
Authors:
Keywords: programming: linear, control, quality & reliability, networks
Abstract:

We consider a standard network revenue management (RM) problem and study the performance of a linear program (LP)‐based control, the Probabilistic Allocation Control (PAC), in the presence of unknown demand parameters. We show that frequent re‐optimizations of PAC without re‐estimation suffice to shrink the asymptotic impact of estimation error on revenue loss. If, in addition to re‐optimizations, we also frequently re‐estimate the parameters, we prove that the performance of PAC in the unknown parameters setting is almost as good as the performance of PAC in the known parameters setting. Our numerical experiments show that PAC yields a revenue improvement of order 0.5%–1.5% relative to LP‐based Booking Limit and Bid Price in most cases. Given the small margin in RM industries, such as the airline industry (about 2%), this level of improvement can easily translate into a significant increase in profit.

Reviews

Required fields are marked *. Your email address will not be published.