Relationships Among Three Assumptions in Revenue Management

Authors:
Serhan Ziya;Hayriye Ayhan;Robert D. Foley
Affiliations:
Department of Statistics and Operations Research, University of North Carolina, CB# 3260, 213 Smith Building, Chapel Hill, North Carolina 27599-3180;School of Industrial and Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, Georgia 30332-0205;School of Industrial and Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, Georgia 30332-0205
Venue:
Operations Research
Year:
2004

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Abstract

This note discusses the relationships among three assumptions that appear frequently in the pricing/revenue management literature. These assumptions are mostly needed for analytical tractability, and they have the common property of ensuring a well-behaved "revenue function." The three assumptions are decreasing marginal revenue with respect to demand, decreasing marginal revenue with respect to price, and increasing price elasticity of demand. We provide proofs and examples to show that none of these conditions implies any other. However, they can be ordered from strongest to weakest over restricted regions, and the ordering depends upon the region.