Optimal Multiperiod Pricing with Service Guarantees

26 Pages Posted: 19 Jun 2011 Last revised: 14 Feb 2014

Christian Borgs

Microsoft Corporation - Microsoft Research New England

Ozan Candogan

Massachusetts Institute of Technology (MIT)

Jennifer Chayes

Microsoft Corporation - Microsoft Research New England

Ilan Lobel

New York University (NYU)

Hamid Nazerzadeh

University of Southern California - Marshall School of Business

Date Written: September 3, 2013

Abstract

We consider the multi-period pricing problem of a service firm facing time-varying capacity levels. Customers are assumed to be fully strategic with respect to their purchasing decisions, and heterogeneous with respect to their valuations, and arrival-departure periods. The firm's objective is to set a sequence of prices that maximizes its revenue while guaranteeing service to all paying customers. Although the corresponding optimization problem is non-convex, we provide a polynomial-time algorithm that computes the optimal sequence of prices. We show that due to the presence of strategic customers, available service capacity at a time period may bind the price offered at another time period. Consequently, when customers are more patient for service, the firm offers higher prices. This leads to the underutilization of capacity, lower revenues, and reduced customer welfare. Variants of the pricing algorithm we propose can be used in more general settings, such as a robust optimization formulation of the pricing problem.

Keywords: Dynamic Pricing, Service Guarantees, Strategic Customers, Nonlinear Programming, Dynamic Programming

JEL Classification: D42, C61

Suggested Citation

Borgs, Christian and Candogan, Ozan and Chayes, Jennifer and Lobel, Ilan and Nazerzadeh, Hamid, Optimal Multiperiod Pricing with Service Guarantees (September 3, 2013). Available at SSRN: https://ssrn.com/abstract=1866674 or http://dx.doi.org/10.2139/ssrn.1866674

Christian Borgs

Microsoft Corporation - Microsoft Research New England ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

Ozan Candogan

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Jennifer Chayes

Microsoft Corporation - Microsoft Research New England ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

Ilan Lobel (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Hamid Nazerzadeh

University of Southern California - Marshall School of Business ( email )

Bridge Memorial Hall
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~nazerzad/

Paper statistics

Downloads
213
Rank
118,171
Abstract Views
1,162