Optimizing the Conditional Value-at-Risk in Revenue Management

Review of Managerial Science 8 (2014), pp. 495-521

36 Pages Posted: 6 Apr 2013 Last revised: 21 Sep 2014

See all articles by Jochen Gönsch

Jochen Gönsch

University of Duisburg-Essen - Mercator School of Management

Michael Hassler

University of Augsburg

Date Written: July 10, 2013

Abstract

Many service industries use revenue management to balance demand and capacity. The assumption of risk-neutrality lies at the heart of the classical approaches, which aim at maximizing expected revenue. In this paper, we give a comprehensive overview of the existing approaches, most of which were only recently developed, and discuss the need to take risk-averse decision makers into account. We then present a heuristic that maximizes Conditional Value-at-Risk (CVaR). Although CVaR has become increasingly popular in finance and actuarial science due to its beneficial properties, this risk measure has not yet been considered in the context of revenue management. We are able to efficiently solve the optimization problem inherent in CVaR by taking advantage of specific structural properties that allow us to reformulate this optimization problem as a continuous knapsack problem. In order to demonstrate the applicability and robustness of our approach, we conduct a simulation study that shows that the new approach can significantly improve the risk profile in various scenarios.

Keywords: Revenue Management, Capacity Control, Dynamic Decisions, Dynamic Programming, Risk-Aversion, Conditional Value-at-Risk

JEL Classification: M11, M19, C61, C63

Suggested Citation

Gönsch, Jochen and Hassler, Michael, Optimizing the Conditional Value-at-Risk in Revenue Management (July 10, 2013). Review of Managerial Science 8 (2014), pp. 495-521, Available at SSRN: https://ssrn.com/abstract=2245623 or http://dx.doi.org/10.2139/ssrn.2245623

Jochen Gönsch (Contact Author)

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

Michael Hassler

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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