On pricing of perishable assets with menu costs

Date
2009-10
Authors
Berk, E.
Gürler, Ü.
Yıldırım, G.
Advisor
Instructor
Source 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
Article
Journal Title
Journal ISSN
Volume Title
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.

Course
Other identifiers
Book Title
Keywords
Perishable Assets, Menu Costs, Dynamic Pricing, Revenue Management
Citation
Published Version (Please cite this version)