Up then Down: The Bid-Price Trends in Revenue Management

29 Pages Posted: 13 Mar 2013 Last revised: 13 Apr 2014

See all articles by Zhan Pang

Zhan Pang

Purdue University - Krannert School of Management

O. Berman

University of Toronto - Rotman School of Management

Ming Hu

University of Toronto - Rotman School of Management

Date Written: March 12, 2013

Abstract

In the classic revenue management (RM) problem of selling a fixed quantity of perishable inventories to price-sensitive non-strategic consumers over a finite horizon, the optimal pricing decision at any time depends on two important factors: consumer valuation and bid price. The former is determined exogenously by the demand side, while the latter is determined jointly by the inventory level on the supply side and the consumer valuations in the time remaining within the selling horizon. Because of the importance of bid prices in theory and practice of RM, this paper aims to enhance the understanding of the intertemporal behavior of bid prices in dynamic RM environments. We provide a probabilistic characterization of the optimal policies from the perspective of bid-price processes. We show that an optimal bid-price process has an upward trend over time before the inventory level falls to one and then has a downward trend. This intertemporal up-then-down pattern of bid-price processes is related to two fundamental static properties of the optimal bid prices: (1) At any given time, a lower inventory level yields a higher optimal bid price, which is referred to as the resource scarcity effect; (2) Given any inventory level, the optimal bid price decreases with time; that is referred to as the resource perishability effect. The demonstrated upward trend implies that the optimal bid-price process is mainly driven by the resource scarcity effect while the downward trend implies that the bid-price process is mainly driven by the resource perishability effect. We also demonstrate how optimal bid price and consumer valuation, as two competing forces, interact over time to drive the optimal-price process. The results are also extended to the network RM problems.

Keywords: Bid price, shadow price, dynamic pricing, revenue management, stochastic dynamic programming

JEL Classification: D4, D8, l00

Suggested Citation

Pang, Zhan and Berman, O. and Hu, Ming, Up then Down: The Bid-Price Trends in Revenue Management (March 12, 2013). Available at SSRN: https://ssrn.com/abstract=2232171 or http://dx.doi.org/10.2139/ssrn.2232171

Zhan Pang

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

O. Berman

University of Toronto - Rotman School of Management ( email )

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

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

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