An Overview of Pricing Models for Revenue Management

An Overview of Pricing Models for Revenue Management

Gabriel Bitran∗ Ren´ Caldentey† e December, 2002

Abstract In this paper we examine the research and results of dynamic pricing policies and their relation to Revenue Management. The survey is based on a generic Revenue Management problem in which a perishable and non-renewable set of resources satisfy stochastic price-sensitive demand processes over a finite period of time. In this class of problems, the owner (or the seller) of these resources uses them to produce and offer a menu of final products to the end customers. Within this context, we formulate the stochastic control problem of capacity that the seller faces: how to dynamically set the menu and the quantity of products and their corresponding prices in order to maximize the total revenue over the selling horizon.

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Introduction

The aim of this paper is to review the growing literature on Dynamic Pricing Policies and its connection to Revenue Management. In general terms, the Revenue Management model that we investigate considers the problem faced by a seller who owns a fixed and perishable set of resources that are sold to a price sensitive population of buyers. In this framework where capacity is fixed, the seller is mainly interested in finding an optimal pricing strategy that maximizes the revenue collected over the selling horizon. The motivation for this work is our strong belief that pricing policies are today, more than ever before, a fundamental component of the daily operations of manufacturing and service companies. The reason is probably because price is one of the most effective variables that managers can manipulate to encourage or discourage demand in the short run. Price is not only important from a financial point of view but also from an operational standpoint. It is a tool that helps to regulate inventory and production pressures. Airline companies and retail chains are good examples of industries where dynamic pricing policies...