On pricing of perishable assets with menu costs
Author
Berk, E.
Gürler, Ü.
Yıldırım, G.
Date
2009-10Source Title
International Journal of Production Economics
Print ISSN
0925-5273
Electronic ISSN
1873-0353
Publisher
Elsevier
Volume
121
Issue
2
Pages
678 - 699
Language
English
Type
ArticleItem Usage Stats
102
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93
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Abstract
We consider dynamic pricing of perishable assets in the presence of price-sensitive
renewal demand processes. Unlike the existing works in the literature, we explicitly
incorporate non-negligible price change costs which reflects the revenue management
practice more realistically. These costs are also known as menu costs in the economic
literature. The objective is to maximize the discounted expected profit for an initial
inventory of Q items by determining the selling prices dynamically. We employ a
dynamic programming approach and formulate a model that captures the price–
demand relationship. We establish some theoretical results on the properties of the
problem at hand. Specifically, we establish the sufficient conditions under which the
within-period profit is concave in the selling price and in the remaining shelf life and,
furthermore, show the structure of the myopically and asymptotically optimal pricing
policy. In a numerical study, we investigate the impact of various system parameters
and, in particular, the existence of menu costs, on pricing decisions. We observe that
ignoring menu costs may be significantly misleading for the implementation of revenue
management. We also propose four implementable policy heuristics and examine their
performances. Our findings support some results previously obtained in settings with
continuous pricing and negligible price change costs; and, contradict some others.