Optimisation of perishable asset revenue management problems that allow prices as decision variables
by Lawrence R. Weatherford
International Journal of Services Technology and Management (IJSTM), Vol. 2, No. 1/2, 2001

Abstract: This paper addresses a new slant to a problem which is general to the service industries - perishable asset revenue management. Traditional approaches have assumed that prices are fixed and solved for the optimal allocation quantities. Our approach recognises that prices affect demand and should therefore be included as decision variables to be optimised. We solve three different types of problems: a) up to n price classes, distinct asset control mechanism, and no diversion, b) up to three price classes, nested asset control mechanism, and no diversion, c) up to three price classes, nested asset control mechanism, and diversion. Analytical results are provided in most cases and examples illustrate the results as well as the time required to solve these complex problems. Finally we look at the trade-off involved between computational time and expected contribution when using heuristic decisions obtained from less realistic assumptions relative to the true optimal decisions. On average, the suboptimality ranged from 0.84% to 8.3% with a corresponding decrease in computing time required on the order of several minutes. Some trends are presented to help determine a priori which type of problems would tend to benefit most from the more accurate formulation. This should help managers decide when it is worth the extra computing time to come up with the true optimal solution.

Online publication date: Thu, 10-Jul-2003

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