Using Dynamic Programming Decomposition for Revenue Management with Opaque Products
Business Research 6 (2013), Issue 1, pp. 94-115
23 Pages Posted: 25 Jan 2011 Last revised: 15 Jul 2015
Date Written: April 26, 2013
Opaque products enable service providers to hide specific characteristics of their service fulfillment from the customer until after purchase. Prominent examples include internet-based service providers selling airline tickets without defining details, such as departure time or operating airline, until the booking has been made. Owing to the resulting flexibility in resource utilization, the traditional revenue management process needs to be modified. In this paper, we extend dynamic programming decomposition techniques widely used for traditional revenue management to develop an intuitive capacity control approach that allows for the incorporation of opaque products. In a simulation study, we show that the developed approach significantly outperforms other well-known capacity control approaches adapted to the opaque product setting. Based on the approach, we also provide computational examples of how the share of opaque products as well as the degree of opacity can influence the results.
Keywords: Revenue Management, Opaque Products, Capacity Control, Dynamic Programming Decomposition
JEL Classification: C61, M11, L91, L93
Suggested Citation: Suggested Citation