Dynamic Pricing of Relocating Resources in Large Networks

94 Pages Posted: 18 Jan 2019 Last revised: 5 Dec 2019

See all articles by Santiago Balseiro

Santiago Balseiro

Columbia Business School - Decision Risk and Operations

David B. Brown

Duke University - Decision Sciences

Chen Chen

Duke University, Fuqua School of Business

Date Written: January 14, 2019

Abstract

Motivated by applications in shared vehicle systems, we study dynamic pricing of resources that relocate over a network of locations. Customers with private willingness-to-pay sequentially request to relocate a resource from one location to another, and a revenue-maximizing service provider sets a price for each request. This problem can be formulated as an infinite horizon stochastic dynamic program, but is quite difficult to solve, as optimal pricing policies may depend on the locations of all resources in the network. We first focus on networks with a hub-and-spoke structure, and we develop a dynamic pricing policy and a performance bound based on a Lagrangian relaxation. This relaxation decomposes the problem over spokes and is thus far easier to solve than the original problem. We analyze the performance of the Lagrangian-based policy and focus on a supply-constrained large network regime in which the number of spokes (n) and the number of resources grow at the same rate. We show that the Lagrangian policy loses no more than O(\sqrt{\ln n/n}) in performance compared to an optimal policy, thus implying asymptotic optimality as n grows large. We also show that no static policy is asymptotically optimal in the large network regime. Finally, we extend the approach to general networks with multiple, interconnected hubs and spoke-to-spoke connections, and to incorporate relocation times. We also examine the performance of the Lagrangian policy and the Lagrangian relaxation bound on some numerical examples, including examples based on data from RideAustin.

Keywords: Dynamic Pricing, Resource Relocation, Hub-and-Spoke Networks, Lagrangian Relaxations, Asymptotic Optimality

Suggested Citation

Balseiro, Santiago and Brown, David B. and Chen, Chen, Dynamic Pricing of Relocating Resources in Large Networks (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=3313737 or http://dx.doi.org/10.2139/ssrn.3313737

Santiago Balseiro

Columbia Business School - Decision Risk and Operations ( email )

3022 Broadway
New York, NY 10027
United States

David B. Brown

Duke University - Decision Sciences ( email )

Durham, NC 27708-0120
United States

Chen Chen (Contact Author)

Duke University, Fuqua School of Business ( email )

Durham, NC
United States

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