Integrated Revenue Management Approaches for Capacity Control with Planned Upgrades

European Journal of Operational Research 223 (2012), 380-391

44 Pages Posted: 30 Nov 2009 Last revised: 4 Apr 2014

See all articles by Claudius Steinhardt

Claudius Steinhardt

Bundeswehr University Munich

Jochen Gönsch

University of Duisburg-Essen - Mercator School of Management

Date Written: May 25, 2012

Abstract

In many service industries, firms offer a portfolio of similar products based on different types of resources. Mismatches between demand and capacity can therefore often be managed by using product upgrades. Clearly, it is desirable to consider this possibility in the revenue management systems that are used to decide on the acceptance of requests. To incorporate upgrades, we build upon different dynamic programming formulations from the literature and gain several new structural insights that facilitate the control process under certain conditions. We then propose two dynamic programming decomposition approaches that extend the traditional decomposition for capacity control by simultaneously considering upgrades as well as capacity control decisions. While the first approach is specifically suited for the multi-day capacity control problem faced, for example, by hotels and car rental companies, the second one is more general and can be applied in arbitrary network revenue management settings that allow upgrading. Both approaches are formally derived and analytically related to each other. It is shown that they give tighter upper bounds on the optimal solution of the original dynamic program than the well-known deterministic linear program. Using data from a major car rental company, we perform computational experiments that show that the proposed approaches are tractable for real-world problem sizes and outperform those disaggregated, successive planning approaches that are used in revenue management practice today.

Keywords: Revenue Management, Upgrades, Capacity Control, Dynamic Programming, Decomposition, Car Rental

JEL Classification: C61, M11, L91, L93

Suggested Citation

Steinhardt, Claudius and Gönsch, Jochen, Integrated Revenue Management Approaches for Capacity Control with Planned Upgrades (May 25, 2012). European Journal of Operational Research 223 (2012), 380-391, Available at SSRN: https://ssrn.com/abstract=1515865 or http://dx.doi.org/10.2139/ssrn.1515865

Claudius Steinhardt (Contact Author)

Bundeswehr University Munich ( email )

Werner-Heisenberg-Weg 39
Neubiberg, 85577
Germany

HOME PAGE: http://www.unibw.de/quantitative-methoden

Jochen Gönsch

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379 - 2777 (Phone)
+49 203 379 - 1760 (Fax)

HOME PAGE: http://udue.de/goensch

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
331
Abstract Views
1,995
rank
130,747
PlumX Metrics