Revenue Management with Flexible Products: The Value of Flexibility and Its Incorporation into DLP-Based Approaches

International Journal of Production Economics 153 (2014), 280–294

42 Pages Posted: 18 Mar 2014 Last revised: 21 Sep 2014

See all articles by Jochen Gönsch

Jochen Gönsch

University of Duisburg-Essen - Mercator School of Management

Sebastian Koch

University of Augsburg

Claudius Steinhardt

Bundeswehr University Munich

Date Written: December 6, 2013

Abstract

A major benefit of flexible products is that they allow for supply-side substitution even after they have been sold. This helps improve capacity utilization and increase the overall revenue in a sto-chastic environment. As several authors have shown, flexible products can be incorporated into the well-known deterministic linear program (DLP) of revenue management’s capacity control. In this paper, we show that flexible products have an additional “value of flexibility” due to their supply-side substitution possibilities, which can be captured monetarily. However, the DLP-based approaches proposed so far fail to capture this value and, thus, steadily undervalue flexible products, resulting in lower overall revenues. To take the full potential of flexible products into account, we propose a new approach that systematically increases the revenues of flexible products when solving the DLP and performing capacity control. A mathematical function of variables available during the booking horizon represents this artificial markup and adapts dynamically to the current situation. We determine the function’s parameters using a standard simulation-based optimization method. Numerical experiments show that the benefits of the new approach are biggest when low value demand arrives early. Revenues are improved by up to 5% in many settings.

Keywords: Revenue Management, Flexible Products, DLP-based Approaches

Suggested Citation

Gönsch, Jochen and Koch, Sebastian and Steinhardt, Claudius, Revenue Management with Flexible Products: The Value of Flexibility and Its Incorporation into DLP-Based Approaches (December 6, 2013). International Journal of Production Economics 153 (2014), 280–294, Available at SSRN: https://ssrn.com/abstract=2410123

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

Sebastian Koch

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Claudius Steinhardt

Bundeswehr University Munich ( email )

Werner-Heisenberg-Weg 39
Neubiberg, 85577
Germany

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

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