Maximum utility product pricing models and algorithms based on reservation price

Authors:
R. Shioda;L. Tunçel;T. G. Myklebust
Affiliations:
Axioma Inc., New York, USA;Department of Combinatorics and Optimization, Faculty of Mathematics, University of Waterloo, Waterloo, Canada N2L 3G1;Department of Combinatorics and Optimization, Faculty of Mathematics, University of Waterloo, Waterloo, Canada N2L 3G1
Venue:
Computational Optimization and Applications
Year:
2011

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Abstract

We consider a revenue management model for pricing a product line with several customer segments under the assumption that customers' product choices are determined entirely by their reservation prices. We highlight key mathematical properties of the maximum utility model and formulate it as a mixed-integer programming problem, design heuristics and valid cuts. We further present extensions of the models to deal with various practical issues arising in applications. Our computational experiments with real data from the tourism sector as well as with the randomly generated data show the effectiveness of our approach.