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      A comparison of fixed and dynamic pricing policies in revenue management

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      Author(s)
      Şen, A.
      Date
      2013
      Source Title
      Omega
      Print ISSN
      0305-0483
      Electronic ISSN
      1873-5274
      Volume
      41
      Issue
      3
      Pages
      586 - 597
      Language
      English
      Type
      Article
      Item Usage Stats
      174
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      Abstract
      We consider the problem of selling a fixed capacity or inventory of items over a finite selling period. Earlier research has shown that using a properly set fixed price during the selling period is asymptotically optimal as the demand potential and capacity grow large and that dynamic pricing has only a secondary effect on revenues. However, additional revenue improvements through dynamic pricing can be important in practice and need to be further explored. We suggest two simple dynamic heuristics that continuously update prices based on remaining inventory and time in the selling period. The first heuristic is based on approximating the optimal expected revenue function and the second heuristic is based on the solution of the deterministic version of the problem. We show through a numerical study that the revenue impact of using these dynamic pricing heuristics rather than fixed pricing may be substantial. In particular, the first heuristic has a consistent and remarkable performance leading to at most 0.2% gap compared to optimal dynamic pricing. We also show that the benefits of these dynamic pricing heuristics persist under a periodic setting. This is especially true for the first heuristic for which the performance is monotone in the frequency of price changes. We conclude that dynamic pricing should be considered as a more favorable option in practice.
      Keywords
      Dynamic pricing
      Heuristics
      Revenue management
      Yield management
      Permalink
      http://hdl.handle.net/11693/21300
      Published Version (Please cite this version)
      http://dx.doi.org/10.1016/j.omega.2012.08.001
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