Dynamic Pricing Strategies for Multiproduct Revenue Management Problems

  • Authors:

  • Constantinos Maglaras;Joern Meissner

  • Affiliations:

  • Columbia Business School, Columbia University, 409 Uris Hall, 3022 Broadway, New York, New York 10027;Lancaster University Management School, Lancaster University, Room A48, Lancaster LA1 4XY, United Kingdom

  • Venue:
  • Manufacturing & Service Operations Management
  • Year:
  • 2006

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Abstract

Consider a firm that owns a fixed capacity of a resource that is consumed in the production or delivery of multiple products. The firm strives to maximize its total expected revenues over a finite horizon, either by choosing a dynamic pricing strategy for each product or, if prices are fixed, by selecting a dynamic rule that controls the allocation of capacity to requests for the different products. This paper shows how these well-studied revenue management problems can be reduced to a common formulation in which the firm controls the aggregate rate at which all products jointly consume resource capacity, highlighting their common structure, and in some cases leading to algorithmic simplifications through the reduction in the control dimension of the associated optimization problems. In the context of their associated deterministic (fluid) formulations, this reduction leads to a closed-form characterization of the optimal controls, and suggests several natural static and dynamic pricing heuristics. These are analyzed asymptotically and through an extensive numerical study. In the context of the former, we show that resolving the fluid heuristic achieves asymptotically optimal performance under fluid scaling.