Revenue Management with Customers’ Reference Price: Are the Existing Methods Effective?

Shirin Aslani (), Soheil Sibdari () and Mohammad Modarres ()
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Shirin Aslani: Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran 11365/8639
Soheil Sibdari: Department of Decision and Information Sciences, Charlton College of Business, University of Massachusetts Dartmouth, North Dartmouth, Massachusetts 02747
Mohammad Modarres: Department of Industrial Engineering, Sharif University of Technology, Tehran, Iran 11365/8639

Service Science, 2018, vol. 10, issue 2, 195-214

Abstract: Existing revenue management methods and heuristics rely on specific demand-side assumptions such as customers’ independent decisions over time. We relax the assumption that purchasing decisions depend only on the current price and are independent of previous prices of the same or similar products. On the contrary, we assume that customers’ decisions depend on the product’s past prices through a reference price . With this new dimension, a firm needs not only to manage its remaining capacity but also to control the reference price to maximize its expected future profit. In this situation, we show that some of the main analytical properties such as monotonicity or modularity of the firm’s value function no longer hold. Consequently, the effectiveness of existing heuristics that have been developed based on these properties become limited and might generate poor results. Examples of such heuristics are the bid price and the booking limit , which are popular methods of revenue management in practice. For the new setting, incorporating a reference price, we update the existing revenue management heuristics and measure their updated effectiveness. We use a comprehensive simulation study to illustrate our results.

Keywords: revenue management; reference price; forecasting; dynamic programming; simulation study (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orserv:v:10:y:2018:i:2:p:195-214

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