Revenue Management with End-of-Period Discounts in the Presence of Customer Learning

Production and Operations Management, Forthcoming

Posted: 31 Jan 2009 Last revised: 21 Feb 2011

See all articles by Anton Ovchinnikov

Anton Ovchinnikov

Smith School of Business - Queen's University; INSEAD - Decision Sciences

Joseph Milner

University of Toronto - Rotman School of Management

Date Written: October 20, 2010

Abstract

Consider a firm that sells identical products over a series of selling periods (e.g., weekly all-inclusive vacations at the same resort). To stimulate demand and enhance revenue, in some periods, the firm may choose to offer a part of its available inventory at a discount. As customers learn to expect such discounts, a fraction may wait rather than purchase at a regular price. A problem the firm faces is how to incorporate this waiting and learning into its revenue management decisions. To address this problem we summarize two types of learning behaviors and propose a general model that allows for both stochastic consumer demand and stochastic waiting. For the case with two customer classes we develop a novel solution approach to the resulting dynamic program. We then examine two simplified models, where either the demand or the waiting behavior are deterministic, and present the solution in a closed form. We extend the model to incorporate three customer classes and discuss the effects of overbooking. Through numerical simulations we study the value of offering end-of-period deals optimally and analyze how this value changes under different consumer behavior, demand, and capacity scenarios.

Keywords: revenue, management, strategic, consumer, behavior, overbooking, pricing, dynamic

Suggested Citation

Ovchinnikov, Anton and Milner, Joseph, Revenue Management with End-of-Period Discounts in the Presence of Customer Learning (October 20, 2010). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1335478

Anton Ovchinnikov (Contact Author)

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

INSEAD - Decision Sciences ( email )

United States

Joseph Milner

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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