Price Guarantees in Dynamic Pricing and Revenue Management

Authors:
Yuri Levin;Jeff McGill;Mikhail Nediak
Affiliations:
School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6;School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6;School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6
Venue:
Operations Research
Year:
2007

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Abstract

We present a new model for revenue management of product sales that incorporates both dynamic pricing and a price guarantee. The guarantee provides customers with compensation if, prior to a fixed future date, the price of the product drops below a level specified at the time of purchase. We consider the problem of simultaneously determining optimal dynamic price and guarantee policies for items from a fixed stock when demand depends both on the price and on the parameters of the price guarantee. The model can be used for pricing any items with limited availability over a fixed time horizon. We formulate this model as a discrete-time optimal control problem, prove the existence of its optimal solution, explore some of the structural properties of the solution, present lower-bounding heuristics for solving the problem, and report numerical results.